Negotiable Instruments

Atty. Rommel Mercado

INTRODUCTION Note: A valid instrument is not necessarily negotiable and a negotiable
instrument may be voidable, unenforceable, or void.
Characteristics of Negotiable Instruments:
Presumption: All negotiable instruments are presumed to be a contract, but
1. Negotiability
not vice-versa.
2. Accumulation of Secondary Contracts
Nature of Negotiable Instruments: a special kind of written contract which
Negotiability: a bill or a note may be passed from hand to hand similar to
serves as an instrument of trade or credit and transferable from hand-to-hand
money; it gives the holder, in due course, the right to hold the instrument and
like money
collect the sum payable for himself free from any infirmity in the instrument or
defect in the title of any of the prior parties, or defenses available to them Ratio for Formal Requirements: for the security of commercial transactions; it
among themselves enables someone to tell at a glance whether an instrument is negotiable or
not; to gauge the risks involved.
Accumulation of Secondary Contracts: occurs as negotiable instruments are
transferred from one person to another; once it is issued, additional parties Explanations for each Formal Requirement:
may be involved
1. It must be in writing: it is broadly construed as to include those which are
Theory of Negotiable Instruments: such instruments appear to belong to the reduced in tangible form; may be made on any thing aside from paper,
person having them in possession and to no one else. as long as it is movable; as long the material is capable of preserving the
writing if they are capable of circulating for a period of time to serve their
Forms of Negotiable Instruments:
credit and currency function.
1. Common Forms
Note: Determining the negotiability of an instrument largely depends on its
2. Special Types
face, no other words should be added or substituted therein.
Examples of Common Forms:
2. It must be signed by the maker or the drawer: Generally, it is placed at
1. Promissory Notes the lower right-hand corner, but it may paper in any part therein; one’s
2. Bill of Exchange signature is a prima facie evidence that he intends to be bound as a the
3. Bank Check maker or drawer; if it the signature was placed and it is not clear what his
Two types of Instruments according to the Negotiable Instruments Law: capacity is, he is deemed as merely an indorser.
3. It must contain an unconditional promise or order to pay: based on the
1. Promissory Notes – those in which the issuer has promised to pay nature of a negotiable instrument wherein it is an absolute undertaking
2. Bills of Exchange – those in which the issuer has ordered a third person to to pay rather than an acknowledgement of an obligation
pay 4. It must be payable in a sum certain in money: it must be from the point
Examples of Special Types: of view of the holder; negotiable instruments acquire a uniform standard
of value enabling them to pass freely in lieu of money.
1. Certificate of Deposit
2. Bank Notes Note: Money includes all those which are legal tender.
3. Bonds Legal Tender: a kind of money which can be used to lawfully pay a debt or
4. Drafts an obligation calling for money.
Policy in case of Doubt: the rule is that the court must resolve in favor of the 5. It must be payable at a fixed or a determinable future time or on
negotiability of the instrument; this is to encourage the free circulation of demand;
negotiable papers. 6. The drawee must be named or identified: it only applies to bills or checks
Function and importance of negotiable instruments: Non-negotiable Instrument: it does not meet the requirement laid down to
1. As substitute of money qualify a negotiable instrument, or an instrument that was negotiable in its
2. As a medium of exchange for most commercial transactions inception but has lost the quality of tis negotiability.
3. As a medium of credit transactions Nature of Non-Negotiable Instruments:
4. As a means, in case of check, of making immediate payment
1. A simple contract in writing and is evidence of such intangible rights as
may have been created by the assent of the parties; covered by the
Section 1. Form of Negotiable Instruments. – An instument to be general provisions of the CC not the NIL;
2. It may not be negotiated but it may be assigned or transferred
negotiable must conform to the following requirements:
Money: that which is coined or stamped by public authority and has its fixed
(a) It must be in writing and signed by the maker or drawer; value fixed by public authority; a medium of exchange authorized by the
(b) Must contain an unconditional promise or order to pay a government as part of its currency.
sum certain in money Promissory Note: According to Sec. 184, “A negotiable promissory note within
(c) Must be payable on demand, or at a fixed or determinable the meaning of this Act is an unconditional promise in writing made by one
future time person to another, signed by the maker, engaging to pay on demand or at a
(d) Must be payable to order or to bearer; and fixed and determinable future time, a sum certain in money to another or his
order or to bearer. Where a note is drawn to the maker’s own order, it is not
(e) Where the instrument is addressed to a drawee, he must be
complete until indorsed by him.”
named or otherwise indicated therein with reasonable
Parties in a Promissory Note/Promise Paper/Two-Party Paper:
certainty.
1. Maker – who makes the promise and signs the instrument; assumes
Commercial Paper: written promises or obligations that arise out of
liability to pay the payee or the holder; his signature must appear in the
commercial transactions from the use of such instruments as promissory notes
instrument
and bills of exchange; a simple promise to pay money.
2. Payee – the party to whom the promise is made or the instrument is
Note: All commercial papers arise from commercial transactions; they are payable; may be specified or not; may seek payment personally or
either negotiable or non-negotiable; it is the former if it satisfies certain formal further negotiate.
requirements.
Holder: refer to every person to whom an instrument is delivered
Negotiable Instrument: a contractual obligation to pay money; an instrument
Indorser: if a payee endorses the note to a third party; the latter is called
which possesses all the elements of negotiability provided in Section 1 of the
indorsee
NIL
Bill of Exchange: According to Sec. 126, “a bill of exchange is an unconditional
Matters to be considered in determining Negotiability of an Instrument:
order in writing addressed by one person to another, signed by the person
1. The whole of the instrument giving it, requiring the person to whom it is addressed to pay on demand, or
2. Only what appears on the face of the instrument at a fixed or determinable future time, a sum certain in money to order or to
3. The provisions of the NIL bearer

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Atty. Rommel Mercado
Check: an order that is drawn on a bank and payable on demand
Parties to a Bill of Exchange/Order Paper/Three-party Paper:
1. Drawer – the person who issues and draws the order bill; gives the order
to pay money to a third person; does not pay directly
2. Drawee – the party upon whom the bill is drawn; the person to whom the
order is addressed and is ordered to pay; becomes the acceptor if he
accepts the responsibility for the payment of the bill
3. Payee – the party in whose favor the bill is originally drawn or is payable
Ratio of Bills of Exchange:
1. Drawer’s funds in the hands of the drawee – the drawee is the party
primarily interested in, and benefited by the transaction
2. Liability of Drawee for non-payment – there must be an agreement
obligating the drawee to honor the order of the drawer or an existing
creditor-debtor relationship
Sec. 2. What constitutes certainty as to sum. - The sum payable is
a sum certain within the meaning of this Act, although it is to be
paid:
(a) with interest; or
(b) by stated installments; or
(c) by stated installments, with a provision that, upon default in
payment of any installment or of interest, the whole shall
become due; or
(d) with exchange, whether at a fixed rate or at the current
rate; or
(e) with costs of collection or an attorney's fee, in case
payment shall not be made at maturity.
Sum Certain Requirement: if the holder can determine from the instrument the
amount he is entitled to receive at maturity; a negotiable instrument must
represent a fixed amount to paid wholly in money ascertainable from the
instrument itself.
Sum to be paid with interest rate: merely incidental and cannot render the
instrument as non-negotiable because the entire sum is till certain:
1. Interest at fixed rate
2. Interest at increased or reduced rate
3. Accrual/Rate of Interest is not specified – if the instrument provides for
payment of interest but failed to specify the date when it will run, it shall
be computed from the date of the instrument, if not dated, form the issue
thereof; if the rate is not specified, legal rate shall apply, 6%.
4. Usurious interest rate – the instrument is still negotiable because the
principal remains valid.
Sum to paid by stated installments:
1. With an acceleration clause – a promise that if any installment or interest
is not paid as agreed, the whole shall become due.
2. Acceleration dependent on maker – he can avoid acceleration by
paying on due date; payee or holder cannot accelerate the not unless,
the maker defaults
3. Acceleration as an option of holder – it is a non-negotiable instrument
Stated Installments: the interest in each installment and the due date of each
installment must be fixed in the instrument
Extension Clauses: appear in instruments with fixed future maturity date and
proved that under certain circumstances, the date shall be further extended
1. If the right is given to the holder - the time of payment need not contain
a new fixed maturity date or the length of extension need not be
specified
2. If the obligor is the one given the right to extend – the interest of the
extension must be specified to keep the instrument negotiable
Sum to be paid with exchange: refer to instrument that are payable in foreign
currency
Exchange: the charge for the expense of providing funds are the place where
the instrument is payable to cover such instrument which is issued at another
place; may be at a fixed rate or current rate
1. Payment in foreign currency – does not impair negotiability because the
sum may be determined by the current exchange rate
2. Payment with exchange rate – applies to instruments drawn in one
country and payable in another
3. Exchange not applicable to inland or domestic bill – exchange cannot
occur if the instrument is drawn and payable at the same place
Note: Under RA 8183, every monetary obligation must be paid in Philippine
currency, unless the parties agree otherwise.
Sum to be paid with costs of collection and/or attorney’s fee:
1. Increase in amount due effective after maturity – does not affect
negotiability because it does not affect the certainty of the amount
payable upon maturity
2. Uncertainty of sum payable only after maturity – anything which only
render the sum payable uncertain after the instrument has ceased to be
a substitute for money. But which in no wise affected it before such time,
cannot impair its negotiability.
3. Liability for attorney’s fees – may be reduced by the Court if
unconscionable or unreasonable; not considered interest; if not
specified, then it shall be set in a reasonable sum
Sec. 3. When promise is unconditional. - An unqualified order or
promise to pay is unconditional within the meaning of this Act
though coupled with:
(a) An indication of a particular fund out of which
reimbursement is to be made or a particular account to be
debited with the amount; or
(b) A statement of the transaction which gives rise to the
instrument.
But an order or promise to pay out of a particular fund is not
unconditional.
Promise to Pay in Promissory Notes:
1. Implied Promise to Pay - it is not essential the word “promise” is used, its
equivalent shall suffice
2. Bare acknowledgement of indebtedness - it is not a negotiable
instrument as it does not import an express promise to pay or show that
the parties intend the debt to be paid; mere evidence of a debt
3. Use of words of negotiability – it can be deduced from the language
used that it is a written undertaking to pay
Order to Pay in Bills of Exchange:
1. Words equivalent to an order to pay – the word “order” is not necessary
its equivalent shall suffice
2. Mere request to pay – it must be a demand and not a request; an order
is a command or imperative direction; the language used must express
the drawer’s will that money should be paid
3. Liability of drawer – if the drawee obeys the order or not, it is immaterial,
negotiability depends on the terms of the order.
Unconditional Promise or Order to Pay:
1. Instrument payable absolutely – not subject to any condition or
contingency, except implied conditions of presentment, protests, and
notice of dishonor
2. Ratio – enhances the ability of the instrument to circulate freely from one
person to another
3. Terms not affecting unconditional liability
Indication of a particular fund out of which reimbursement is to be made: it is
negotiable because the order to pay is not conditional; drawee is not limited
to the money that he has, which belongs to the drawer; fund indicated is not
the direct source of payment but only the source of reimbursement.
Indication of a particular fund out of which payment is to be made: it is a non-
negotiable instrument because it is not payable in any event and is
dependent ton the adequacy or existence of the fund designated. The test is
whether the instrument carries the general personal credit of the maker or
drawer
Indication of a particular amount to be debited with the amount: it is
negotiable because the promise or order is not conditional; payment is not
confined to a particular fund, but still needs to be made
Statement of transaction which gives rise to instrument:
1. Mere recital of consideration for instrument or origin of transaction – it
does not make the instrument conditional; such reference has no
adverse legal effect on its negotiability
2. Terms and conditions contained in another paper – it not negotiable
because the obligation to pay is burdened with the terms and conditions
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Atty. Rommel Mercado
of another contract. Remember, the negotiability of an instrument must
be determined from what appears on its face.
Rule of Section 3: Negotiability of an instrument is not affected by a reference
which is simply a:
1. A recital of the consideration for which the paper was given
2. A statement of the origin of the transaction
3. As statement that is given in accordance with the terms of a contract
between the same parties
Sec. 4. Determinable future time; what constitutes. - An
instrument is payable at a determinable future time, within the
meaning of this Act, which is expressed to be payable:
(a) At a fixed period after date or sight; or
(b) On or before a fixed or determinable future time specified
therein; or
(c) On or at a fixed period after the occurrence of a specified
event which is certain to happen, though the time of
happening be uncertain.
An instrument payable upon a contingency is not negotiable,
and the happening of the event does not cure the defect.
Instruments must be payable at all events: it must not be payable upon a
contingency because it does not appear on its face whethere or not it will be
paid
Note: A note stipulating that it may be renewed at maturity is non-negotiable
because there Is no unconditional promise to pay at maturity.
Certainty as to the time of payment: the payment will certainly become due
and deamndable one time or other, thoguh it may be uncertain when that
time will come
Instrument is Certain in Payment if: (1) Payable on demand; or (2) At a fixed
and determinable future time
Ratio:
1. To let the holder know when he may enforce the isntrument;
2. To know when the statute of limitations will arise
3. So that the person liable woiuld know when he is required to pay
4. So that secondary parties would know when will the obligation arise
Demand Instrument: the holder may call for payment at any time
Term or Time instrument: payable only upon the arrival of the time for payment
Checks: by definition, must be payable on demand
Payable at a Fixed Time: “I promise to pay X on Dec. 12, 2018.”
Payable at a fixed period after date: “On or before sixty datys after date, I
promixe x x x.” – refers to date of issuance
Payable at a fied period after sight: “60 days after sight, pay to order x x x.” –
after sight means after the isntrument is seen by the drawee upon
presentment for acceptance or accepted by the drawee
Payable on or before a fixed time:
1. “On or before x, I promise to pay…” – Maker has the option to pay
before due date, while Payee can demand only at the time fixed.
2. “On demand or at the end of the year x x x.” – payee has the power to
decalre the note due at any given time before maturity; it render the
note non-negotiable because it render the time of payment uncertain.
Note: An instrument is still negotiable if the holder’s right to exercise the option
depends upon the hapenning of a specified event over which he has no
control.
Extension Clause: “I promis to pay on or before X, but if I fail to collect on or
before X, this note shall be extended to X.”
Payable on or before a future determinable time: a definite time upon or after
the occurenceof an event which is certain to happen
Payable on the occurrence of a certain event: Death of a person is absolutely
certain to happen, although its occurrence is uncertain
Payable after occurrence of an event: “20 days after Y dies x x x.”
Note: a bill payable several days before the occurrence of an event is non-
neogtiable, maturity of the instrument can only be ascertained after it has
become overdue. Therefore, the time of payment is ucnertain
Payable upon a contingency: a future and uncertain event, which may or
may not happen
Payable when able without an absolute date:
1. A conditional promise – negotiability is destroyed by the contditipn and
the lack of a fixed time for payment
2. An absolute promise to pay at an unreasonable time – does not follow
the principle that a promise to pay within a reasonable time is not so
certain as to render an instrument negotiable
Sec. 5. Additional provisions not affecting negotiability. - An
instrument which contains an order or promise to do any act in
addition to the payment of money is not negotiable. But the
negotiable character of an instrument otherwise negotiable is
not affected by a provision which:
(a) authorizes the sale of collateral securities in case the
instrument be not paid at maturity; or
(b) authorizes a confession of judgment if the instrument be not
paid at maturity; or
(c) waives the benefit of any law intended for the advantage
or protection of the obligor; or
(d) gives the holder an election to require something to be
done in lieu of payment of money.
But nothing in this section shall validate any provision or
stipulation otherwise illegal.
General Rule: An instrument is non-negotiable if it contains a promise or order
to do any act in addition to the payment of money
Exceptions: if the law procvides otherwise
1. Sale of Collateral Securities – “I promise to paty X secured by an X …”
2. Confession of judgement – acknowledgement by the debtor at his
debt to another is justly due; enables the holder to obtain a judgement
without the delay incidental to a lawsuit because it cuts off all defenses;
“I hereby authorize my attorney-in-law to appear in any court after the
obligation becomes due and waive the issueng and service of process
and confess jdugement against me in favor of the holder of the note
xxx.” Thus, invalidit of the confession of judgement does not render the
instrument non-negotiable
Note: Warrants of attorney to confess judgement are void for being against
public policy
3. Cognavit actiomen: he has confessed action; a written confession of
action by the defendant acknowledging his indebtedness to the
plaintiff after the action was filed
4. Relicta Verificationem: his pleading being abandoned; confession of
judgement by withdrawal of the defens
5. Waiver of beenfit granted by law:
6. Election of holder to require some other act: gives the payee the right
to repossess the property sold; if the option wsi with the promisor, the
instrument is non-negotiable
Sec. 6. Omissions; seal; particular money. - The validity and
negotiable character of an instrument are not affected by the
fact that:
(a) it is not dated; or
(b) does not specify the value given, or that any value had
been given therefor; or
(c) does not specify the place where it is drawn or the place
where it is payable; or
(d) bears a seal; or
(e) designates a particular kind of current money in which
payment is to be made.
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Atty. Rommel Mercado
But nothing in this section shall alter or repeal any statute
requiring in certain cases the nature of the consideration to be
stated in the instrument.
Omission on Date:
1. General Rule: The date in a bill or note is not necessary; the instrument
will be considered to be dated as of the time it was issued
2. Exception: when date is necessary
a. If the date is tied to the date of issue
b. Determining when the interest shall run
c. For promissory notes, the date of issue
d. For bills of exchange, the date of the last negotiation thereof – to
determine whether a party acted within a reasonable time in
making the payment
Date stated not in calendar: the law will deem the nearest date of the month
the date intended.
Omission of value: “it is fiven for value received …” wihtout specifying what
the value is; consideration is presumed; the burden on proving the lack
thereof lies on the one alleging it.
Note: There are no laws which require that the nature of the consideration is
stated in the instrument.
Ommission of Place: the place where it is drawn or made or where it is
payable is not essential. Section 73 provides:
a. An instrument is presumed to have been made where it is dated
b. A note that does not specify the place of payment is presumed to be
payable at the place of residence of the maker
c. If the place of execution or payment is not stated, it is presumed to be
the maker’s or drawer’s palce of business or his home
Presence of Seal: it does not destroy negotiability; there is no difference; it is
advised to have it appear in a public instrument so that it will be included
among the preferred credits with respect to other property of the debtro
Designation of a particular kind of money: The law does not requrie that
payment be made in legal tender; it includes any kind of current or foreign
money which has fixed value in relation to our money
Sec. 7. When payable on demand. - An instrument is payable on
demand:
(a) When it is so expressed to be payable on demand, or at
sight, or on presentation; or
(b) In which no time for payment is expressed.
Where an instrument is issued, accepted, or indorsed when
overdue, it is, as regards the person so issuing, accepting, or
indorsing it, payable on demand.
First paragraph – not only between parties, but also as to subsequent parties
Second paragraph – applies only to immediate parties (there is no difference
between a holder in due course and a person not a holder in due course)
Other terms that may be used to express “on demand” – “at sight,” “or
presentation,” “on call,” “at any time called for,” “at such times the payee
may require,” “at the holder’s convenience”
When an instrument is payable on demand:
1. Expressed to be payable on demand
2. No time for payment is expressed
3. Payable on demand as regards the maker
4. Payable on demand as regards the acceptor
5. Payable on demand as regards the indorser
Sec. 8. When payable to order. - The instrument is payable to
order where it is drawn payable to the order of a specified
person or to him or his order. It may be drawn payable to the
order of:
(a) A payee who is not maker, drawer, or drawee; or
(b) The drawer or maker; or
(c) The drawee; or
(d) Two or more payees jointly; or
(e) One or some of several payees; or
(f) The holder of an office for the time being.
Where the instrument is payable to order, the payee must be
named or otherwise indicated therein with reasonable certainty.
Standardized words of negotiability – serve as an expression of consent by the
issuer of the instrument that the instrument may be transferred, to whoever the
payee orders, allowing further negotiation of the instrument (to the order of,
or order, to bearer, or bearer)
When an instrument is payable to order:
1. Drawn payable to the order of a specified person
2. Drawn to him or his order
Other term that may be used to express “to order” – “and assigns”
When payee/drawee not named or described – nobody could give the order
or authority to correct. There will be nobody who could indorse the instrument,
hence, there is no point in considering it negotiable
Sec. 9. When payable to bearer. - The instrument is payable to
bearer:
(a) When it is expressed to be so payable; or
(b) When it is payable to a person named therein or bearer; or
(c) When it is payable to the order of a fictitious or non-existing
person, and such fact was known to the person making it so
payable; or
(d) When the name of the payee does not purport to be the
name of any
person; or
(e) When the only or last indorsement is an indorsement in blank.
Bearer: the person in possession of a bill or note which is payable to bearer
Instrument payable to bearer – negotiated by mere delivery. There is no need
to indorse the instrument. Whoever is in possession of the instrument is the
bearer thereof; hence, he is the holder of the instrument and the same is
payable to him
Fictitious person: one who, though named or specified as a payee in an
instrument, has no right to it because the maker or drawer so intended and it
matters not, therefore, whether the name of the payee used by him be that
one living or dead, or one who never existed
When instrument payable to bearer:
1. Expressed to be payable to bearer – may also be expressed as “to
holder,” “or holder,” “or to any one whom he may deliver it or to any one
who might hold the same by delivery”
Note: “payable to the order of bearer” is payable to order, not to bearer
2. Payable to person named therein or bearer – the words “or bearer” may
be presumed to be the maker’s intent for the bearer to give control to
the bearer over the instrument
3. Payable to order of a fictitious person – a name is fictitious when it is
feigned or pretended. If the payee is known to the maker or drawer and
is existing, the instrument will be one payable to order instead of to
bearer
4. Payable to order of a non-existing person – payee named is one who
does not exist and has never existed. As this would render the
indorsement impossible, the manifest intent of the drawer is to necessarily
make the instrument a bearer paper negotiable by delivery
5. Name of payee not name of person – aka, payable to an impersonal
payee. This essentially shows intent by the drawer or maker to make the
instrument payable to bearer
6. Only indorsement in blank – when indorser simply writes his name on the
back of the instrument, the same becomes payable to bearer
7. Last indorsement in blank – since the last indorsement is in blank, the
instrument becomes payable to bearer and the same may negotiate
the bill by deliver
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Atty. Rommel Mercado
Sec. 10. Terms, when sufficient. - The instrument need not follow
the language of this Act, but any terms are sufficient which
clearly indicate an intention to conform to the requirements
hereof.
Exact words – not required, so long as words used clearly indicate an intention
to adhere to the requirements of the NIL. So long as requisites of negotiability
are present, the instrument will remain negotiable
Substance criterion of negotiability:
1. Clear intention of the parties – substance over form will be observed, as
far as negotiable instruments are concerned. Hence, so long as the clear
intention of the parties to make the instrument negotiable can be
determined, the law will give it force and effect
2. Use of foreign language – does not affect negotiability
3. Mere defect in language or grammatical error – does not affect
negotiability
Sec 11. Date, presumption as to – Where the instrument or an
acceptance or any indorsement thereon is dated, such date is
deemed prima facie to be the true date of the making, drawing,
acceptance or indorsement, as the case may be.
Presumption as to date:
1. Date of instrument, acceptance, or any indorsement –
a. If instrument bears a date – said date is presumed to be the date when
it was made or drawn
b. If acceptance or indorsement in bill is dated – it is considered the date
of such acceptance or indorsement
c. The indorsement of the instrument is dated
2. Evidence of a different date: he who claims some other date is the true
date has the burden to establish such claim. But since these dates are merely
prima facie evidence of the true dates in the making, drawing, acceptance,
or indorsement of the instrument, such dates may be overturned by
convincing evidence to the contrary
Date in instrument:
1. General rule – date is not essential to make an instrument negotiable
2. Exceptions –
a. Where instrument is payable at a fixed period after date – “X days after
date;” date is material to determine date of maturity or date from which to
start counting X days
b. Where instrument is payable at a fixed period after sight or presentment –
“X days after sight;” date is material to determine when the counting will
commence to run
Date in instrument payable on demand – immaterial, since such instrument is
payable anytime.
Exception:
1. Promissory notes – must be presented for payment within a reasonable time
after its issue
2. Bills of exchange – within a reasonable time after the last negotiation
Sec 12. Ante-dated and post-dated – The instrument is not invalid
for the reason only that it is ante-dated or post-dated, provided
this is not done for an illegal or fraudulent purpose. The person to
whom an instrument so dated is delivered acquires the title
thereto as of the date of delivery.
Ante-dated – when date contained is earlier than the true date of issuance
Post-dated – when date contained is later than the true date of issuance
Effect of ante-dating and post-dating – no effect as to the negotiability of an
instrument, so long as it is not done for an illegal or fraudulent purpose
Effectivity of instrument ante/post-dated – when an ante-dated or postdated
instrument is delivered to a person, the latter acquires the title to the
instrument as of the date of its delivery, regardless of the date appearing on
the instrument
Sec 13. When date may be inserted – Where an instrument
expressed to be payable at a fixed period after date is issued
undated, or where the acceptance of an instrument payable at
a fixed period after sight is undated, any holder may insert
therein the true date of issue or acceptance and the instrument
shall be payable accordingly. The insertion of a wrong date does
not avoid the instrument in the hands of a subsequent holder in
due course; but as to him, the date so inserted is to be regarded
as the true date.
When date may be inserted:
1. Where an instrument is payable at a fixed period after date but is issued
undated
2. Where an instrument is payable at a fixed period after sight but the
acceptance is undated
Effect of insertion of wrong date:
1. If done by one having knowledge of true date – instrument is avoided as to
him or any one claiming under him
2. If subsequent holder in due course receives an instrument with the wrong
date – as he acquires the instrument in good faith, even if the date is wrong,
it will be regarded as the true date
Sec 14. Blanks; when may be filled – Where the instrument is
wanting in any material particular, the person in possession
thereof has a prima facie authority to complete it by filling up the
blanks therein. And a signature on a blank paper delivered by
the person making the signature in order that the paper may be
converted into a negotiable instrument operates as a prima
facie authority to fill it up as such for any amount. In order,
however, that any such instrument when completed may be
enforced against any person who became a party thereto prior
to its completion, it must be filled up strictly in accordance with
the authority given and within a reasonable time. But if any such
instrument, after completion, is negotiated to a holder in due
course, it is valid and effectual for all purposes in his hands, and
he may enforce it as if it had been filled up strictly in accordance
with the authority given and within a reasonable time.
Steps in issuance of negotiable instrument:
1. Mechanical act of writing the instrument completely and in accordance
with Sec 1 requirements
2. Delivery of the complete instrument by the maker or drawer to the payee
or holder with the intention of giving effect to it
SECTION 14 Incomplete and delivered
SECTION 15 Incomplete and undelivered
SECTION 16 Complete but undelivered
Blanks:
OBVIOUS BLANKS APPARENTLY COMPLETE
Left at time instrument is made or Blanks only because written matter
indorsed, of such a character as does not so fully occupy the entire
manifestly to indicate that the paper as to preclude the insertion
instruments are incomplete until of additional words, figures, or both
such blanks shall be filled up
Rules where instrument incomplete but delivered:
1. Authority to fill up the blanks – holder in possession has prima facie authority
to complete an incomplete instrument by filling up the blanks therein
2. Authority to put any amount – a signature on a blank paper delivered in
order that it may be converted into a negotiable instrument operates as a
prima facie authority to fill it up as such for any amount
3. Right against party prior to completion – instrument may be enforced only
against a party prior to completion if filled up strictly in accordance with the
authority given and within a reasonable time
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 Negotiable Instruments
Atty. Rommel Mercado
4. Right of holder in due course – defense that the instrument had not been
filled up in accordance with the authority given and within a reasonable time
is a personal defense. It is not available as against a holder in due course
Sec 15. Incomplete instrument not delivered – Where an
incomplete instrument has not been delivered, it will not, if
completed and negotiated without authority, be a valid
contract in the hands of any holder, as against any person whose
signature was placed thereon before delivery.
Rules where instrument incomplete and undelivered:
1. Defense against a holder in due course – the fact that an incomplete
instrument, completed without authority, has not been delivered, is a real
defense even against a holder in due course
2. Defense available to parties prior to delivery – invalidity of the above
instrument is only with reference to parties whose signatures appear on the
instrument before and not after delivery
Sec 16. Delivery; when effectual; when presumed – Every
contract on a negotiable instrument is incomplete and
revocable until delivery of the instrument for the purpose of
giving effect thereto. As between immediate parties and as
regards a remote party other than a holder in due course, the
delivery, in order to be effectual, must be made either by or
under the authority of the party making, drawing, accepting, or
indorsing, as the case may be; and, in such case, the delivery
may be shown to have been conditional, or for a special
purpose only, and not for the purpose of transferring the property
in the instrument. But where the instrument is in the hands of a
holder in due course, a valid delivery thereof by all parties prior
to him so as to make them liable to him is conclusively presumed.
And where the instrument is no longer in the possession of a party
whose signature appears thereon, a valid and intentional
delivery by him is presumed until the contrary is proved.
Sec 17. Construction where instrument is ambiguous – Where the
language of the instrument is ambiguous or there are omissions
therein, the following rules of construction shall apply:
(a) Where the sum payable is expressed in words and also in
figures and there is a discrepancy between the two, the sum
denoted by the words is the sum payable; but if the words are
ambiguous or uncertain, reference may be had to the figures to
fix the amount;
(b) Where the instrument provides for the payment of interest,
without specifying the date from which interest is to run, the
interest runs from the date of the instrument, and if the instrument
is undated, from the issue thereof;
(c) Where the instrument is not dated, it will be considered to be
dated as of the time it was issued;
(d) Where there is a conflict between the written and printed
provisions of the instrument, the written provisions prevail;
(e) Where the instrument is so ambiguous that there is doubt
whether it is a bill or note, the holder may treat it as either at his
election;
(f) Where a signature is so placed upon the instrument that it is
not clear in what capacity the person making the same
intended to sign, he is to be deemed an indorser;
(g) Where an instrument containing the word "I promise to pay"
is signed by two or more persons, they are deemed to be jointly
and severally liable thereon.
AMBIGUITY or OMISSION RULE
Sums expressed in words vs. sums Expressed in words, because figures
expressed in figures form no part of the instrument and
are simply an abridgement, and it is
easier to change figures or to
commit a mistake on them

Rules where mechanically complete: Ambiguous Words or Uncertain Figures may be referred to in order
to determine true amount
1. Undelivered – instruments completely written is incomplete and revocable
until delivery for purpose of giving it effect Undated Instrument Date of issuance will govern
a. Delivery – transfer of possession, actual or constructive from one Written v. Printed Written, because they are deemed
person to another to express true intent of the maker
b. Issue – first delivery of the instrument, complete in form, to a person or drawer
who takes it as holder
Bill v. Note Holder may treat either at his
c. Holder – payee or indorsee of a bill or note who is in possession of it, or
election
the bearer thereof
Capacity of person who signed in Indorser. This rule only applies when
2. Delivered – place where instrument was written, signed, or dated, does
doubt there’s an ambiguity in the
not necessarily fix or determine place where it was executed. Delivery is
signature’s location
what’s of decisive importance, it is the final act essential to its consummation
as an obligation. May be made via agent Instrument signed by two or more Solidary Liability
persons
3. In possession of party other than a holder in due course – if a complete
instrument is found in the possession of an immediate party or a remote
party other than a holder in due course, there is a prima facie presumption
of delivery but subject to rebuttal Sec 18. Liability of person signing in trade or assumed name – No
a. Immediate parties – refers to those who are immediate in the sense of
person is liable on the instrument whose signature does not
having or being held to know of the conditions or limitations placed appear thereon, except as herein otherwise expressly provided.
upon the delivery of the instrument But one who signs in a trade or assumed name will be liable to
b. Remote parties – parties who are not in direct contractual relation to the same extent as if he had signed in his own name.
each other
GR: only persons whose signatures appear on an instrument are liable
4. Delivered conditionally or for a special purpose – if delivery was made or
authorized, it may be shown to have been conditional, or for a special XPN:
purpose only, and not for the purpose of transferring the property to the 1. Where a person signs in a trade or assumed name
instrument 2. The principal is liable if a duly authorized agent signs on his own behalf
5. In the hands of a holder in due course – if a complete instrument is in the 3. In a case of forgery, forger is liable even if his signature does not appear
hands of a holder in due course, a valid delivery thereof by all parties prior to on instrument
him is conclusively presumed. This is equivalent to saying that in such case, 4. Where acceptor makes his acceptance of a bill on a separate paper
delivery is not necessary 5. Where a person makes a written promise to accept a bill before it is
drawn

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 Negotiable Instruments
Atty. Rommel Mercado
Signing in a trade or assumed name – one who signs in a trade or assumed
name is liable as if he signed his own name
1. Trade name – business name or a pseudonym used by companies to
perform their business
2. Assumed name – a pseudonym or alias that a person or group assumes for
a purpose which can differ from the original name
Sec 19. Signature by agent; authority; how shown – The signature
of any party may be made by a duly authorized agent. No
particular form of appointment is necessary for this purpose; and
the authority of the agent may be established as in other cases
of agency.
Signature by an authorized agent:
1. Authority of agent to sign principal’s name – may be shown, as in other
cases of agency, to have been given orally or in writing subject to the
provisions of the Statute of Frauds
2. Authority of agent to indorse instrument payable to principal – right of an
agent to indorse commercial papers is a very responsible power and will not
be lightly inferred
3. Corporations act only by agents – any person who accepts for cash checks
made payable to a corporation, which can act only by agents, without
making any inquiry as to the authority of the individual to exchange checks
belonging to said payee-corporation, does so at his peril, and must abide by
the consequences if the supposed agent who indorses the same is without
authority
Sec 20. Liability of person signing as agent, and so forth – Where
the instrument contains or a person adds to his signature words
indicating that he signs for or on behalf of a principal or in a
representative capacity, he is not liable on the instrument if he
was duly authorized; but the mere addition of words describing
him as an agent, or as filling a representative character, without
disclosing his principal, does not exempt him from personal
liability.
Requisites for an agent to escape personal liability after signing a negotiable
instrument:
1. He is duly authorized
2. He adds words to his signature indicating that he signs as an agent, that
is, for or on behalf of a principal, or in a representative capacity
3. He discloses his principal – failure to do so will render him personally
bound by the instrument
Sec 21. Signature by procuration; effect of – A signature by
"procuration" operates as notice that the agent has but a limited
authority to sign, and the principal is bound only in case the
agent in so signing acted within the actual limits of his authority.
Procuration: act by which a principal gives power to another to act in his
place as he could himself. It gives a warning that the agent has but a limited
authority, so that is the duty of the person dealing with him to inquire into the
extent of his authority
Effect of signature by procuration:
1. Where agent exceeded his authority – principal is not bound if agent
exceeded actual limits of his authority, although he may have acted within
the general scope of the agency
2. Where agent acted with abuse of authority given – abuse of authority is not
a defense against a bona fide holder for value
Sec 22. Effect of indorsement by infant or corporation – The
indorsement or assignment of the instrument by a corporation or
by an infant passes the property therein, notwithstanding that
from want of capacity, the corporation or infant may incur no
liability thereon.
Indorsement by incapacitated persons:
1. Minors – voidable at his instance or at the instance of his guardian
2. Other incapacitated persons – others who have no capacity to give
consent are insane or demented persons and deaf-mutes who do not know
how to read and write. Such is a real defense, which is available even against
a holder in due course
Indorsement by a corporation: corporation is not liable on notes in a suit
thereon by an indorsee, where the corporation is without capacity to make
the contract in fulfillment of which they were executed
Sec 23. Forged signature; effect of – When a signature is forged
or made without the authority of the person whose signature it
purports to be, it is wholly inoperative, and no right to retain the
instrument, or to give a discharge therefor, or to enforce
payment thereof against any party thereto, can be acquired
through or under such signature, unless the party against whom
it is sought to enforce such right is precluded from setting up the
forgery or want of authority.
Forgery: (1) signing of another’s name; (2) alteration of an instrument in the
name, amount, description of the person and the like; there must be intent to
defraud
Application:
1. GR: forgery makes the SIGNATURE wholly inoperative; no right can to
retain, give a discharge, or enforce payment can arise therefrom
2. XPN: (1) party to whom it is sought to be enforced is precluded from
setting up the forgery or want of authority; and (2) the forged signature
is not necessary to the holder’s title, in which case the forgery may be
disregarded
3. Sec. 23 applies in the following cases:
a. The signature on the instrument is affixed by one who does not claim
to act as an agent and who has no authority to bind the person whose
signature he has forged
b. The signature is affixed by one who purport to be an agent but has no
authority to bind the alleged principal
Effect of forged signature: the signature is wholly inoperative and no right can
be acquired thru the forged signature; person whose signature is forged was
never a party because he never consented
Forgery: a real defense against a holder in due course
Proof of Forgery: a mechanism of fraud; must be proven clearly and
convincingly; the burden of proof lies on the party alleging forgery
Cases of Forgery:
1. Forgery of Promissory notes
a. Forgery of an indorsement
b. Forgery of the maker’s signature
2. Forgery of bills of exchange
a. Forgery of an indorsement
b. Forgery of the drawer’s signature, either
i. With acceptance by the drawee
ii. Without such acceptance but the bill is paid by the drawee
Extent of Effect of Forgery: does not purport to declare the instrument totally
void nor the genuine signatures thereon inoperative; ONLY APPLIES TO THE
FORGED OR UNAUTHORIZED SIGNATURE; rights mays till exist and may be
enforced
Forged Indorsement: prevents any subsequent party from acquiring any right
against any party whose name appears prior to forgery; the forged
indorsement cuts off the rights of all subsequent parties against parties prior to
the forgery; except, when such party is precluded from setting up the forgery
Persons precluded from setting up the defense of forgery: synonymous to
estoppel
Two classes:
1. By their acts, silence, or negligence are estopped from setting up the
defense of forgery
2. Who warrant or admit the genuineness of the signatures in question: (a)
indorsers; (b) acceptors; and (c) persons negotiating by delivery
Right to recover damages: party precluded by reason of his negligence can
still recover damages under quasi-delicts
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Atty. Rommel Mercado
Examples:
1. Drawee bank paid a check with the name of the drawer forged,
although amount of the check exceeds authorized limit – gross
negligence and the irregularity was apparent on its face
2. Drawer’s negligence facilitated the encashment of checks and
prevented the discovery of fraud – failed to provide security and
safekeeping measures for spoiled checks; failed to reconcile bank
statements; the proximate cause
3. Drawee bank fails to timely notify collecting bank of forgery after
clearing; there is a 24-hour period for a drawee bank to return a check
to the collecting bank if the check is defective; however, drawee bank
still has a remedy against the party who made the alteration
4. Depositor entrusted to his secretary who was able to encash and deposit
several checks: (1) whoever claims for damages by reason of forgery has
the burden of proof; (2) he was negligent
5. Failure to examine bank statements – proximate cause of his own
damage; he had sufficient opportunity to prevent or detect
misappropriation
6. Collecting bank or last indorser generally suffers the loss because it has
the duty to ascertain the genuineness of all prior indorsements, unless the
collecting banks was able to exercise its due diligence
7. If payment is made, drawee cannot charge It to the drawer’s account
because he is in a position to detect the forgery because he has the
maker’s signature and is expected to know and compare it; unless,
drawer’s negligence is the proximate cause of his loss, in such case,
there needs to be a weighing of comparative negligence between the
draw and the drawee to determine who should bear the burden of loss
8. Banking is a business imbued with public interest and must exercise a
higher degree of due diligence
Note: when an indorsement is forged, the collecting bank or last indorser
bears the loss; unless, the drawee bank fails to return the check to the
collecting bank within 24 hours
Proximate Cause: cause, which, in natural and continuous sequence,
unbroken by any efficient intervening cause, produces the injury , and without
which the result would not have occurred
FORGERY OF SIGNATURE OF FORGERY OF INDORSEMENT
DRAWER
Drawee is in a position to verify the Drawee has no opportunity to verify
drawer’s signature an indorsement
Drawee is liable to its depositor for Drawee can recover the money it
paying forged check paid because of a forged signature
Right of drawee to recover payment where drawer’s signature is forged: As
between equally innocent persons, the drawee who pays money on a check
where the signature on which is forged cannot recover the money from the
one who received it – based on estoppel, actual and presumed negligence,
and principle of natural justice
Drawee bank: has the obligation to know the signature of th drawer and is
presumed that he does.
Drawee Bank’s responsibility:
1. He bears the loss if he pays out on a forged signature of the depositor
2. If the payee is not a client of the drawee bank, the latter had no way of
ascertaining the authenticity of the payee’s indorsement on the checks;
thus, it cannot be held negligent
3. In case both he drawee bank and collecting bank are at fault, there will
be a weighing of comparative negligence.
Right of drawee to recover payment where payee’s or indorser’s signature
was forged:
1. From the encasher or the last indorser – drawee bank has no duty to
ascertain the genuineness of the sigantures of the payee or indorsers; an
indorser is supposes to warrant to the drawee that the signature of the
payee and previous indorsers are genuine Drawee may recover money
from negligent encashers or last indorsers because of the latter’s
negligence
2. From the drawer or depositor; generally, drawee bank cannot debit or
charge the drawer’s account for the amount of the check it paid and is
not entitled to indemnification; the drawee bank bears the loss; EXCEPT,
when the drawer is guilty of negligence which causes the bank to honor
such a check
3. In case of forgery by an agent or employee, the negligence of the
depositor prevents the recovery of an unauthorized payment because
he failed to exercise due diligence
Rights of parties in case of forged indorsements:
1. NOTE Payable to order
- the party whose indorsement is forged is not liable to any holder, even
a holder in due course
- Parties prior to forgery are also not liable to holder
2. NOTE Payable to bearer
- The party whose indorsement is forged is liable to aholder in due
course but not to a holder not in due course
- Prior parties to the forged signature may also be held liable by a bolder
not in due course
- Forged endorsement does not prevent the transfer of title
3. BILL payable to order
- The party whose indorsement is forged is not liable to any holder, even
if a holder in due course
- Signature of payee was forged, collecting bank is liable tot payee and
must bear the loss because it has the duty to ascertain payee’s
indorsement before encashing
- If the drawee pays under a forged indorsement, the drawer is not
liable in the bill and the drawee may not debit the drawer’s account;
it may pass the liability back thru the collection chain to the party who
took from the forger and the forger himself
- Check received for collection and deposit, the bank cannot be
expected to know or ascertain the genuineness of all prior
indorsements
- By stamping, a collecting bank makes the assurance that it has
ascertained the genuineness of all prior indorsements
[xxx]
4. BILL payable to bearer
- The drawee may debit from the drawer’s account in spite of the
forged instrument
- Forged endorsement is not necessary to the title of the holder
- Drawee bank cannot recover from holder
Sec. 124. Alteration of instrument; effect of. - Where a negotiable
instrument is materially altered without the assent of all parties
liable thereon, it is avoided, except as against a party who has
himself made, authorized, or assented to the alteration and
subsequent indorsers.
But when an instrument has been materially altered and is in the
hands of a holder in due course not a party to the alteration, he
may enforce payment thereof according to its original tenor.
Material Alteration: any change in the instrument which affects or changes
the liability of the parties in any way or changes the contract of the parties
thereto in any respect
Section 124: refers to physical alterations of the instrument
Effect of Alteration:
1. Alteration by a party - alteration made by the HOLDER is shall effect the
discharge of the instrument and all prior parties thereto who did not give
their consent to such alteration
a. It does not matter whether it is favorable or not to the party making
the alteration or to the interests of prior parties, or whether it is
innocently or fraudulently made
b. There are certain exceptions on the effect of material alteration. It
does not discharge the instrument against:
i. A party who has made the alteration
ii. A party who authorized or assented to the alteration
iii. Indorser who indorsed subsequent to alteration
c. If alteration is apparent, the party claiming under the instrument has
the burden to explain the alteration or that he had no part therein or
that he is a holder in due course
d. If it is not apparent on the face of the instrument despite exercising
due diligence, the burden is on the party alleging it
e. If drawee-bank pays a materially altered check, it has no right of
reimbursement from the drawer
2. Alteration by a stranger – it is called spoliation, which has the same effect
as alteration
3. Right of a holder in due course
a. Material alteration avoids the instrument in the hands of one who is
NOT a holder in due course as against any prior party who has not
assented to the alteration
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 Negotiable Instruments
Atty. Rommel Mercado
b. If negotiated to a holder in due course, he may enforce payment
thereof according to its original tenor regardless of whether the
alteration was innocent or fraudulent
Ratio:
1. To maintain the integrity surrounding commercial relations – no party shall
be benefitted under the guise to alter the written obligation of another
without his authority or assent; otherwise, it would allow the perpetration
of fraud
2. The discharge of the debt upon one who tampers with the instrument –
no man should be permitted to take the chance of gain by the
commission of a fraud without running the risk of loss in case of detection
Sec. 125. What constitutes a material alteration. - Any alteration
which changes:
(a) The date;
(b) The sum payable, either for principal or interest;
(c) The time or place of payment:
(d) The number or the relations of the parties;
(e) The medium or currency in which payment is to be
made;
(f) Or which adds a place of payment where no place of
payment is specified, or any other change or addition
which alters the effect of the instrument in any respect,
is a material alteration.
Section 125: provides a list of material alteration; if not mentioned, the
alteration is immaterial and will not discharge the instrument nor affect the
liability of the parties to the instrument prior to the alteration (ex. Serial number,
marginal figures).
1. Date
- whether it hastens or postpones the time of payment; the same
applies for date from which interests runs;
- HOWEVER, date of indorsement is not material IF it is not necessary to
fix the maturity of the instrument UNLESS the issue is whether the
indorsement was made before or after maturity
2. Sum payable
- Change in the amount of the principal or interest, to increase or
reduce
- Addition of “with interest”
- Alteration in marginal figures is NOT material when the sum stated in
words in the body remains unchanged
- Insertion of “with interest” AFTER execution with authority of the maker
IS NOT material
- Insertion of “legal rate of interest” where the instrument has a provision
for interest at __ percent is NOT material
3. Time of payment
- Change in the maturity of the instrument, whether the time of
payment is curtailed or extended
- Changes in the marginal notation to correct an obvious mistake is NOT
material
- Change of date if the one stipulated does not appear in the calendar
is not material
4. Place of Payment
- Changes place of payment or inserts a place of payment where non
is specified BECAUSE maker is deprived if the advantages under Sec.
70
- Changes in the name of a bank a which an instrument is payable after
execution IS NOT material
5. Number or relations of the parties
- Addition of co-maker. Addition of surety after the name of co-maker;
addition of trustee after the name of the payee; erasure of payee’s
name’ insertion of the name of another person; leaving a space blank
ETC. (refer to book, sobrang daming examples)
6. Medium or currency of payment
- “in current funds” or “in gold coins” or originally in Philippine Peso and
altered to US Dollars
7. Other alterations
- Substitution of the word or bearer for or order or vice versa; writing
protest waived above blank indorsement; erasure of without recourse
above signature of indorse; change of “I” to “We”
Non-acceptance of check with erasure, alteration, or deficiency: it shall not
be eligible or acceptable for clearing EXCEPT Post-dated checks bearing
the Bank Stamp
Sec 24. Presumption of consideration – Every negotiable
instrument is deemed prima facie to have been issued for a
valuable consideration; and every person whose signature
appears thereon to have become a party thereto for value.
Consideration: inducement to a contract; the cause, price, or impelling
influence which induces a person to enter into the contract; the proximate
purpose
Motive: personal or private reasons of a party in entering into a contract
Presumption of Consideration:
1. Need not be expressly stated – it is presumed that it has been issued for
a valuable consideration and that every person whose signature
appears there has become a party thereto for value
2. Need not be alleged and proved – it is presumed the payee or holder
does not have the burden of proof
3. Lack of consideration as a defense – may be used only against the
payee. Other holders who take instrument in good faith may demand
payment even though no consideration was given between original
parties on the instrument
Sec 25. Value, what constitutes — Value is any consideration
sufficient to support a simple contract. An antecedent or pre-
existing debt constitutes value; and is deemed such whether the
instrument is payable on demand or at a future time.
Consideration: any prestation sufficient to support any contract in favor of the
party to an instrument, it may consist in giving, doing, or not doing
Adequacy of Consideration: valuable consideration need not be adequate,
it is sufficient if it is valuable; mere inadequacy of the price is not a ground for
voiding the instrument, unless there is fraud, mistake, or undue influence
Valuable consideration: in general terms be said to consist either in some right,
interest, profit, or benefit accruing to the party who makes the contract, or
some forbearance, detriment, loss, responsibility, act, labor, or service, on the
other side
Antecedent or Pre-existing Debt:
1. Debt of a third person – its discharge is a valuable consideration for a
negotiable instrument
2. Security for pre-existing debt – negotiable instruments may used as a
security for new purchases and antecedent debts as well
Sec 26. What constitutes holder for value – Where value has at
any time been given for the instrument, the holder is deemed a
holder for value in respect to all parties who become such prior
to that time.
Holder for value: one who has given a valuable consideration for the
instrument issued or negotiated to him; the holder (who is the last indorsee of
an instrument) is also considered a holder for value with respect to all persons
who became parties to the instrument prior to the time it is shown that
valuable consideration had been given
Sec 27. When lien on instrument constitutes holder for value —
Where the holder has a lien on the instrument arising either from
contract or by implication of law, he is deemed a holder for
value to the extent of his lien.
Holder has a lien on instrument:
Amount of Instrument is more than Amount of Instrument is less than
debt the equal to the debt
Pledgee is a holder for value to the Pledgee is a holder for value for the
extent of his lien. He can collect the full amount and may, therefore,
full value of the instrument, and recover all
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 Negotiable Instruments
Atty. Rommel Mercado
apply the same to the payment of - If accommodation party pays, he becomes the holder of the
the debt but he must deliver the instrument
surplus to the pledgor 2. IN CASE OF CORPORATIONS
- Sec. 29 does not apply because the issue or indorsement by a
If defenses exist between pledgor and party liable: pledgee can collect on corporation without consideration and for the accommodation of
instrument only to the extent of the amount of debt. If the defenses of the
another is ULTRA VIRES
party liable on the instrument are real defenses, the pledgee can recover
- Signatories thereof will be personally liable if it is proven that the
nothing upon the instrument
accommodation was done in their personal capacities
3. ACCOMODATION PARTY AS A SURETY
Sec 28. Effect of want of consideration – Absence or failure of - The accommodated party is the principal debtor
- He is equally and absolutely bound
consideration is a matter of defense as against any person not a
- In contrast to a surety agreement, the accommodation party is
holder in due course; and partial failure of consideration is a
primarily liable and unconditional as well for a holder for value – he is
defense pro tanto, whether the failure is an ascertained and a solidary co-debtor
liquidated amount or otherwise. - Except in case of the defense of absence of consideration, the
Absence of consideration – total lack of any valid consideration for the accommodation party is still liable to a holder in due course
contract, in consequence of which the alleged contract must fall. In other 4. RIGHT OF ACCOMMODATION PARTY TO NOTICE OF DEFAULT OR
words, if no consideration is given, or if the consideration is illegal DELINQUENCY OF THE ACCOMMODATED PARTY
Failure of consideration – failure or refusal of one of the parties to do, perform, - Right to be appraised of default or delinquency because he is
or comply with the consideration agreed upon. In other words, if the agreed solidarily liable
consideration did not materialize. Partial failure of consideration is a defense - Failure to do so would entitle the accommodation party to payment
pro tanto, meaning to the extent of the failure for damages
5. INSTRUMENT VITIATED BY AN ILLEGALITY OF CAUSE
Personal defense – absence or failure of consideration is only a personal
defense because it is a good defense only as against a holder who is not a - Payee or holder cannot recovery against the accommodation party
holder in due course 6. LIABILITY OF SOLIDARY ACCOMMODATION MAKERS
- Accommodation makers executed a note or a bill jointly and
severally, anyone of them may be held liable when the principal
Sec. 29. Liability of accommodation party. - An debtor failed to pay
accommodation party is one who has signed the instrument as Rights of Accommodation Party:
maker, drawer, acceptor, or indorser, without receiving value
1. RIGHT TO REVOKE ACCOMODATION
therefor, and for the purpose of lending his name to some other - Since accommodation is gratuitous, it may be revoked by
person. Such a person is liable on the instrument to a holder for cancellation or by notice to the interested parties at any time before
value, notwithstanding such holder, at the time of taking the the instrument is negotiated for value
instrument, knew him to be only an accommodation party. - If already negotiated, he is liable according to the face of the
Accommodation Note or Bill: undertaking
2. RIGHT TO REIMBURSMENT FROM ACCOMODATED PARTY
- the accommodation party puts his name, without consideration, for the - If he pays to the holder, he is entitled to reimbursement from the
purpose of accommodation some other party who shall use it, and is accommodated party
expected to pay; a loan of one’s credit - Generally, accommodated party is expected to pay directly to holder
- Accommodation paper creates no obligation upon delivery to the because the former is the real debtor
accommodated party and has no legal effect and creates no 3. RIGHT TO CONTRIBUTION FROM OTHER SOLIDARY ACCOMODATION
obligation until delivered or negotiated to a holder of value MAKER
Accommodation party: - Solidary maker may seek the contribution of theor solidary
accommodation makers to satisfy their obligation, in the absence of
- signed the instrument (a) as maker, drawer, acceptor or indorsee; (b)
an agreement to the contrary and subject to conditions imposed by
without receiving value for the signature; and (c) the purpose of lending
law
his name to some other person;
- An implied promise to equally share the burden resulting from the
- expects that the accommodated party shall pay come due date
execution of the note
- He is in effect a surety of the accommodated party
Without Receiving Value Therefor: does not mean that one cannot be an
Accommodated Party:
accommodation party because he received some consideration for the use
- One in whose favor a person without receiving value therefor, signa an of his name; the last word therefor refer to the instrument and not the use of
instrument fir the purpose of lending his credit and enabling said party to the name. THUS, there was “no value received for the instrument”
raise money upon it
Kinds of accommodation party:
- Impliedly agrees to take up the instrument upon maturity and indemnify
the accommodation party in case of non-payment 1. Accommodation Maker
2. Accommodation Drawer
Parol Evidence: it may be used to prove accommodation because it is
3. Accommodation Acceptor
difficult to tell from the signature whether one signs as an accommodation
4. Accommodation Indorser
party
ACCOMMODATION PARTY REGULAR PARTY
No presumption: one who signs the check without any indication as to what
capacity is presumed to be an accommodation party. Signs the instrument without Signs the instrument for value
receiving value therefor
Liability of accommodation party to a holder:
Signs for the purpose of lending his Does not sign for said purpose
1. In case of ABSENCE OF CONSIDERATION between the accommodation name for another
party and the accommodated party
- It is not a valid defense a holder for value, even though he knew of May show parol evidence to prove Cannot disclaim or limit his liability
such fact when he became a holder accommodation as appearing on an instrument by
parole evidence
- Accommodation party has no right to the instrument unless
accommodated party defaults

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 Negotiable Instruments
Atty. Rommel Mercado
Cannot avail of the defense of Ma avail the defense of absence or
absence or failure of consideration failure of consideration against a
against a holder not in due course holder not in due course
After paying the holder, he may sue May not sue a subsequent party for
for reimbursement the reimbursement
accommodated party
Sec. 30. What constitutes negotiation. - An instrument is
negotiated when it is transferred from one person to another in
such manner as to constitute the transferee the holder thereof. If
payable to bearer, it is negotiated by delivery; if payable to
order, it is negotiated by the indorsement of the holder and
completed by delivery.
Mode of transfer of bill or note:
Transfer - process by which property is delivered by one person to another.
The transfer of a negotiable instrument may be by delivery or by delivery and
indorsement.
Bill of exchange/ promissory note - may be transferred in many different ways.
The law does not prescribe any exclusive method of transferring negotiable
instruments but only the manner in which their independence of equities or
defenses that might obtain between the original parties may be preserved.
3 methods of transferring a negotiable instrument:
 Issue - first delivery of a complete instrument to a person who takes it as
a holder. An instrument’s legal life does not begin until it is issued by the
maker or drawer to the first holder.
 Negotiation- It ordinarily involves indorsement, thus negotiation and
indorsement are often use interchangeably. Negotiation allows the
transferee to acquire a better right to a negotiable instrument that the
transferor had. Whether the holder is a holder in due course depends
upon factors other than the fact of negotiation. Requires delivery of the
instrument.
 Assignment - it may or may not involve indorsement in the sense of writing
in the back of the instrument. Although it may be transferred by
indorsement and delivery, the assignee acquired the instrument subject
to the rules applicable to non-negotiable papers. Requires delivery of the
instrument.
Meaning of negotiation
- No negotiation if the transfer does not make the transferee the holder of
the instrument.
- The manner required for negotiation depends on the form of the
instrument.
 Payable to order- delivery with indorsement
 Bearer instrument- delivery only
- The payee/ indorsee of a bill or note who is in possession of it or the bearer
thereof is the “holder”.
Methods of negotiation
1. Payable to order
- Payable to the payee therein or the indorsee or to the person ordered
or authorized by the payee to collect.
- The order or authority is made by means of indorsement followed by
delivery of indorsee.
- The instrument must be shown when demanding payment from the
party who is being asked to pay.
2. Payable to bearer
- Any person in possession of the an instrument is always the bearer
thereof although he may have no legal right thereto.
- If the instrument is negotiated to a holder in due course, the latter may
acquire a better right than the transferor.
3. Delivery
- Actual or constructive possession, from one person to another.
Payment of instrument by drawee not negotiation
- The payment of a check by the drawee bank is not a negotiation and
does not make the bank a holder in due course.
- The bank is neither the payee or indorsee. The moment the check is
received by the bank it is extinguished and cannot be put in circulation.
- The writing of the name of the holder on the back of the check is not an
indorsement. It merely serves as a receipt for money. Once paid, the
check becomes a voucher. Payment only effects a discharge not a
transfer of title.
- Bank has no obligation to make partial payments when a check is drawn
for a greater amount than what is in the account of the depositor. This is
because upon partial payment, the bank cannot ask the holder to
surrender the check as payment is incomplete. Thus, the bank would not
have a voucher to show that the amount has been paid. This rule is
based on commercial convenience.
Meaning of assignment
- The assignment of a bill or note merely means a transfer of the title to the
instrument, with the assignee taking only such title as his assignor has. It is
subject to all the defenses available against his assignor.
- The word transfer is also used when referring to assignment. The transfer
always constitutes assignment of contract, when negotiation takes
place, the transferee becomes a holder.
- An express prohibition written on the instrument is required to render an
instrument non-assignable or non-transferable. A stamp of non-
negotiable does not preclude the assignment or transfer of the
instrument.
Effect of delivery of order instrument without indorsement:
- The transfer operates as an assignment.
- The transferee will not become the holder of the instrument. However,
the assignee acquires the right to have the indorsement of the assignor.
When an indorsement is subsequently obtained, the transfer operates as
a negotiation only as of the time indorsement is actually made.
- Effect: you cannot collect on anyone who did not indorse the instrument
but you can still collect from the maker.
NEGOTIATION ASSIGNMENT
Refers to negotiable instruments Refers to a general contract
Transferee is a holder Transferee is an assignee
Subject to real defenses Subject to real and personal
defenses
May acquire a better title or greater Steps into the shoes of the assignor
rights to the instrument
A general indorser warrants the Does not warrant the solvency of
solvency of the prior parties prior parties unless expressly
stipulated or the insolvency is
known to him
Indorser is not liable until there is Liable even without notice of
notice of dishonor dishonor
NIL Civil code Art. 1624-1635
Note: The differences are immaterial when only the maker is sought to be
held.
Payment by means of an instrument is merely conditional
- The payment through assignment or negotiation with the use of
negotiable instruments is merely conditional. It is conditional that it can
only be converted to cash at maturity.
- Different from insurance because in insurance the moment that the
check or note is accepted, the insurance becomes operative.
Can there be a negotiation to payee? There are 2 schools of thought
1. No, since delivery is part of the creation of a negotiable instrument. Thus,
the first delivery to the payee is not a negotiation because before the
writing is delivered there can be no negotiable instrument.
2. Yes, negotiated is not confined to transfer after delivery to the payee
because a holder may also be a payee. This is supported by sec 30 & sec
191 which provides that an instrument is negotiated when it is delivered
to the payee, indorsee or to the bearer thereof.
Ways that an instrument can be negotiated to a payee
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1. The payee, as the first holder, acquires title to the instrument via issue. If
the negotiation refers to an instrument already completed or issued then
only the holders subsequent to the payee can acquire title by
negotiation. The delivery must be made diretly by the maker/drawer to
the payee.
2. When delivery is made by the maker/drawer to a person not the payee,
such as an agent of the maker or drawer, the payee has acquired title
by negotiation.
3. When the instrument is delivered back to the payee by the last holder,
the payee becomes a holder. The indorsement of the last holder is not
needed because payee is remitted to his former rights.
Delivery of negotiable instrument
1. Actual/ constructive
2. Indorsement is an indorsement completed by delivery.
3. The delivery of the instrument is the operative facts that shows the
intention of the maker/drawer to be bound by it.
4. Delivery is presumed from possession , however this can be rebutted by
proof that the instrument was lost or stolen. This does not apply against a
holder in due course.
Where delivery is conditional
- Condition precedent- the instrument becomes operative only upon the
happening of a future, contingent event. Can be proven by parole
evidence because this is a condition precedent attaching to the
obligation.
Condition subsequent: parole evidence is not admissible to show a parole
condition. The written contract governs.
Sec. 31. Indorsement; how made. - The indorsement must be
written on the instrument itself or upon a paper attached thereto.
The signature of the indorser, without additional words, is a
sufficient indorsement.
- Indorsement is the writing of the name of the payee at the back of the
instrument to transfer title to it or strengthen the security of the holder by
assuming a contingent liability for its payment or both.
- Indorsement involves a new contract and an obligation on the part of the
indorser- implied guaranty.
- Each indorsement generates an additional contract between the indorser
and all subsequent holders.
- An indorsement involves the certainty of 2 things: (1) identity of the
indorser (2) genuineness of the signature
- A person cashing or paying on the instrument has the duty to ascertain
both before paying
- Acceptor does not admit the genuineness of the indorser’s signature.
Necessity of indorsement
- Essential to the execution of the instrument payable to the order of the
maker/drawer.
- Essential to the negotiation of an order instrument.
- A person may acquire title even without indorsement. However, without
the indorsement, the holder cannot be a holder in due course.
- Estoppel may take the place of an indorsement to uphold the transfer of
a note or bill such as where the indorsement is forged or unauthorized and
the other party is precluded from setting up the forgery.
Forms of indorsement
- Indorsement must be in writing or in print. The indorsement in rubber stamp
or typewritten complies with the requirement.
- The use of the word assign does not make a negotiation a mere
assignment.
- The signature of an indorser without any words is blank indorsement.
- When the name of the indorsee is specified, it is a special indorsement.
The indorser may add words which prohibit or further limit the negotiation
of the instrument.
Place of indorsement
- The place where the indorsement is written is not essential. It may be at
the front or back.
- May also be written on a paper attached to the instrument. This is known
as allonge.
- When it is unclear as to what capacity a person intended to sign, he shall
be deemed as an indorser.
- An allonge can be used even if there is still space on the instrument. This is
allowed since nobody would gain any advantage by inserting his name
in the space and rendering himself liable to those who endorsed below
him upon the note or the allonge.
Sec. 32. Indorsement must be of entire instrument. - The
indorsement must be an indorsement of the entire instrument. An
indorsement which purports to transfer to the indorsee a part only
of the amount payable, or which purports to transfer the
instrument to two or more indorsees severally, does not operate
as a negotiation of the instrument. But where the instrument has
been paid in part, it may be indorsed as to the residue.
- Indorsement must be for the whole instrument because there cannot be
partial delivery of one instrument or piecemeal payments to several
persons. The object is to avoid multiplicity of suits because an instrument
divided into different parts divides the cause of action.
- Joint payees- indorsement to transfer the instruments to 2 or more people
severally does not operate as a negotiation because the cause action is
split. However, it is valid when the indorsees are joint.
- Alternative payees- payable to 2 or more alternative payees. Negotiation
of the instrument may be made by the indorsement of either of them.
Sec. 33. Kinds of indorsement. - An indorsement may be either
special or in blank; and it may also be either restrictive or
qualified or conditional.
Methods of negotiation
a. Special
b. Blank
Kind of title transferred
a. Restrictive
b. Non-restrictive
Scope of liability of indorser
a. Qualified
b. Unqualified/ general
Presence or absence of limitations
a. Conditional
b. Unconditional
Other kinds of indorsement
a. Joint
b. Successive
c. Irregular/ anomalous
d. Facultative
Note: Once an instrument satisfies all the requirements of negotiability, no
indorsement, even a restrictive one can negate its negotiable status.
Sec. 34. Special indorsement; indorsement in blank. - A special
indorsement specifies the person to whom, or to whose order, the
instrument is to be payable, and the indorsement of such
indorsee is necessary to the further negotiation of the instrument.
An indorsement in blank specifies no indorsee, and an instrument
so indorsed is payable to bearer, and may be negotiated by
delivery.
Special indorsement:
- 2 forms of special indorsement: (1) specifies the person to whom the
instrument is payable (2) specifies to whose order the instrument is
payable.
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Atty. Rommel Mercado
- Must be signed by the indorser
- No need for the use of the words of negotiability. It is enough that the
instrument is valid on its face.
- If the instrument is payable to order and is negotiated by special
indorsement, the indorsement of the indorsee is necessary for the further
negotiation of the instrument.
- If payable to order, can be negotiated by mere delivery even if with
special indorsement. Effect is that the indorser will only be liable to those
holders who acquired title through his indorsement. A special
indorsement will convert a bearer paper to an order paper and the party
specified will have to indorse the instrument before it can be further
negotiated.
Blank indorsement
- Specifies no particular indorsee
- Consists of only the signature of the payee or indorser on the back of the
instrument.
- Payable to bearer and may be negotiated by delivery alone.
Sec. 35. Blank indorsement; how changed to special
indorsement. - The holder may convert a blank indorsement into
a special indorsement by writing over the signature of the
indorser in blank any contract consistent with the character of
the indorsement.
- An instrument payable to order in its face may become a bearer
instrument if the last indorsement was blank. However, a holder may
protect himself by converting the instrument into an order instrument by
writing over the signature of the indorser in blank any contract consistent
with the character of the indorsement.
- But a bearer instrument remains as that and is negotiable by mere
delivery even if the indorsement is a blank or special one.
Note: Writing of the words “protest waived”, “demand”, or “notice waived”
constitutes a material alteration as it would vary the liability of the indorser.
Sec. 36. When indorsement restrictive. - An indorsement is
restrictive which either:
(a) Prohibits the further negotiation of the instrument; or
(b) Constitutes the indorsee the agent of the indorser; or
(c) Vests the title in the indorsee in trust for or to the use of some
other persons.
But the mere absence of words implying power to negotiate
does not make an indorsement restrictive.
Sec. 37. Effect of restrictive indorsement; rights of indorsee. - A
restrictive indorsement confers upon the indorsee the right:
(a) to receive payment of the instrument;
(b) to bring any action thereon that the indorser could bring;
(c) to transfer his rights as such indorsee, where the form of the
indorsement authorizes him to do so.
But all subsequent indorsees acquire only the title of the first
indorsee under the restrictive indorsement.
- A restrictive indorsement prohibits the the further negotiation of the
instrument or restricts it for a particular person or for a particular purpose
or modifies the rights of the holders or the liabilities of the indorser.
- Destroys the negotiability of the instrument. The defenses available
against the indorser are not cut all off by the transfer of the instrument
under such an indorsement in the absence of waiver or estoppel. All
subsequent indorsees acquire only the title of the first indorsee under the
restrictive indorsement.
- Limits the rights of an indorsee because the indorser notifies all
prospective indorsers that the indorsee has only the authority to deal with
the instrument as directed and that the indorsee only has a restrictive
title.
- Use of restrictive words removes the negotiability of the instrument.
3 classes of restrictive indorsement
 Prohibits further negotiation- limits the payment of the instrument to a
specific person
 Constitutes indorsee agent of indorser- indorsee is the collection agent in
behalf of another
 Vests title in indorsee for the benefit of the indorser or a 3rd party- trust or
agency relationship
Sec. 38. Qualified indorsement. - A qualified indorsement
constitutes the indorser a mere assignor of the title to the
instrument. It may be made by adding to the indorser's signature
the words "without recourse" or any words of similar import. Such
an indorsement does not impair the negotiable character of the
instrument.
- Indorser becomes mere assignor
- Limits the liability of the indorser
- Qualified by the words “sans recourse”, “without recourse”, “at
indorsee’s own risk”, or “indorser not holder” to either a blank or special
indorsement
- Recourse means a resort to a person who is secondarily liable after the
default of the person primarily liable.
- An indorsement without recourse does not affect the negotiable quality
of the instrument but only shows an unwillingness to be answerable for
the solvency of the parties. It passes title without making the indorser
liable upon the instrument.
- The words “I hereby transfer and assign all my right, title, and interest”
and other similar words of assignment or transfer appearing above the
signature of the indorser constitute an indorser without recourse.
However, the rights of the indorsee is limited to the rights acquired by the
assignor.
- Despite the qualified indorsement, the indorser is still secondarily liable for
the breach of warranties. Thus he is still liable for the non-payment of the
instrument when there is forgery, lack of good title to the instrument
indorser, lack of capacity to contract on the part of prior parties, the fact
that the instrument was valueless or not valid at the time of the
indorsement which fact was known to him.
- Good precaution to indorse without recourse if the instrument has a long
period of maturity because there is a danger that the principal debtor
might become insolvent.
- A qualified indorsement does not affect the negotiability of the
instrument.
Sec. 39. Conditional indorsement. - Where an indorsement is
conditional, the party required to pay the instrument may
disregard the condition and make payment to the indorsee or
his transferee whether the condition has been fulfilled or not. But
any person to whom an instrument so indorsed is negotiated will
hold the same, or the proceeds thereof, subject to the rights of
the person indorsing conditionally.
Absolute indorsement: Indorser binds himself to pay when the other parties fail
to pay and upon due notice of such.
Conditional indorsement
- The indorser imposes some other conditions to his liability or on the
indorsee’s right to collect the proceeds of the instrument.
- In the nature of a special indorsement, it does not affect the further
negotiation of the instrument. The party required to pay may do so
without incurring any liability. But the person who received payment will
hold the proceeds subject to the right of the conditional indorser.
- While a condition in the indorsement does not destroy negotiability, a
condition appearing on the face of the instrument renders the instrument
non-negotiable.
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Atty. Rommel Mercado
- Binding only between the indorser and the indorsee.
Sec. 40. Indorsement of instrument payable to bearer. - Where
an instrument, payable to bearer, is indorsed specially, it may
nevertheless be further negotiated by delivery; but the person
indorsing specially is liable as indorser to only such holders as
make title through his indorsement.
- An instrument payable to bearer is not converted to an instrument
payable to order by virtue of a special indorsement. The instrument may
be negotiated further by delivery. The only effect of the special
indorsement is that he will be liable to those holders who can trace their
title to the instrument by a series of unbroken indorsements from such
special indorsement. His liability shall be that of a general indorser.
- Applies only to instruments originally payable to bearer
Sec. 41. Indorsement where payable to two or more persons. -
Where an instrument is payable to the order of two or more
payees or indorsees who are not partners, all must indorse unless
the one indorsing has authority to indorse for the others.
Application: two or more payees or indorsees jointly NOT instruments payable
to two or more persons severally (example of non -application: Pay to the
order of P or A) in the latter case, it is governed by Sec. 8 (e) and may be
negotiated by any of such alternative payees and anyone of such parties in
possession is the holder.
Indorsement by all payees or indorsees: If payable TO THE ORDER of 2 or more
payees or indorsees, all must indorse the order to operate as negotiation. In
case of lack of the other’s indorsement, the indorsee has no right of action
Indorsement of a Co-Payee: If he had no authority to sign for the other, the
instrument is no longer transferable as a negotiable instrument and becomes
a non-negotiable. However, the indorsement and delivery of the instrument
by one of two joint payees to his co- payee may transfer full title to the latter.
Exception to the rule requiring joint indorsement:
1. Where payees or indorsees are partners
- An indorsement of an instrument payable to partners doing business
under a firm name, must be in the name of such firm
2. Where the payee or indorsee indorsing has authority to indorse for others
Sec. 42. Effect of instrument drawn or indorsed to a person as
cashier. - Where an instrument is drawn or indorsed to a person
as "cashier" or other fiscal officer of a bank or corporation, it is
deemed prima facie to be payable to the bank or corporation
of which he is such officer, and may be negotiated by either the
indorsement of the bank or corporation or the indorsement of the
officer.
Cashier and other officers: may be expressly authorized to issue a negotiable
paper for the corporation or may have such power from implication by reason
of having previously exercised such power;
Instrument drawn or indorsed to a cashier or other officers: it is deemed prima
facie payable to the corporation and may be negotiated by such
corporation thru the indorsement of any of its duly authorized officers.
Corporation: does not include municipal corporations
Rebuttable Presumption: may be disproved by sufficient evidence to the
contrary – where the cashier personally owns the instrument
Sec. 43. Indorsement where name is misspelled, and so forth. -
Where the name of a payee or indorsee is wrongly designated
or misspelled, he may indorse the instrument as therein described
adding, if he thinks fit, his proper signature.
Options in case of misspelled indorsements:
1. Sign his name in the same way it appears
2. Sign his name but adding his proper signature
A person may correct a spelling error only if the intention of the maker or
drawer was that the instrument should be payable to the person making the
correction.
Any variance between the name of the payee on the face of an instrument
and the signature on the back thereof should be ignored if the payee and
the indorser are the same person.
Sec. 44. Indorsement in representative capacity. - Where any
person is under obligation to indorse in a representative
capacity, he may indorse in such terms as to negative personal
liability.
- An instrument may be indorsed by a person either personally or through
an agent.
- The authority of the agent need not be in writing.
Sec. 45. Time of indorsement; presumption. - Except where an
indorsement bears date after the maturity of the instrument,
every negotiation is deemed prima facie to have been effected
before the instrument was overdue.
- To constitute one a holder in due course he must have taken the
instrument before it was overdue
- If the indorsement bears a date, the presumption is that it is the true date.
- If the indorsement is without a date, the presumption is that it was
negotiated before maturity
- He who alleges that the indorsement was effected AFTER maturity has
the burden of proof
Sec. 46. Place of indorsement; presumption. - Except where the
contrary appears, every indorsement is presumed prima facie to
have been made at the place where the instrument is dated.
- an indorsement is presumed to have been made at the place where the
instrument is dated, unless the contrary is proven
- an indorsement is governed by the law of the state where it is made
although the instrument is executed in a different state.
Sec. 47. Continuation of negotiable character. - An instrument
negotiable in its origin continues to be negotiable until it has
been restrictively indorsed or discharged by payment or
otherwise.
General Rule: an instrument negotiable in origin is always negotiable until paid
even if the instrument dishonored, or is already overdue, however, any one
who acquires it would no longer be a holder in due course.
Exceptions:
1. When the instrument has been restrictively indorsed
- should be construed to refer only to such restrictive indorsement as
prohibits further negotiation of the instrument
2. When it has been discharged by payment or otherwise
- payment is not the only way of discharging an instrument (refer to Sec.
119)
Note: An instrument indorsed after it become overdue is considered payable
on demand
GR: a paper that is non-negotiable in its inception continues to be non-
negotiable; indorsement cannot change its character
XPN: If indorsed to order or bearer, it becomes, as between the indorser and
subsequent holders, a negotiable instrument.
Sec. 48. Striking out indorsement. - The holder may at any time
strike out any indorsement which is not necessary to his title. The
indorser whose indorsement is struck out, and all indorsers
subsequent to him, are thereby relieved from liability on the
instrument.
Instrument payable to bearer: may be negotiated by mere delivery without
indorsement; if indorsed, it remains a bearer instrument and may be further
negotiated by mere delivery
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 Negotiable Instruments
Atty. Rommel Mercado
Option of Holder: Strike out all intervening indorsement or any of them for none
of them is necessary of his title; cancellation of an indorsement also released
those subsequent indorser from liability on the instrument.
Instrument Payable to Order: may be negotiated only by the indorsement of
the payee completed by delivery;
- If indorsement is special – special indorsee is necessary for further
negotiation
- Blank indorsement – it becomes an instrument payable to bearer
Blank Indorsement in an ORDER Instrument:
- holder can strike out all indorsements subsequent to the blank
indorsement;
- subsequent special indorsement are not necessary because he could
have acquired title thereto by mere delivery;
- the indorser whose indorsement is cancelled and all indorsers
subsequent to him are thereby discharged from their liability.
- BUT HE CANNOT STRIKE OUT THE PAYEE’S INDORSEMENT – the instrument is
originally payable to order and cannot be validly negotiated without his
indorsement
Sec. 49. Transfer without indorsement; effect of. - Where the
holder of an instrument payable to his order transfers it for value
without indorsing it, the transfer vests in the transferee such title
as the transferor had therein, and the transferee acquires in
addition, the right to have the indorsement of the transferor. But
for the purpose of determining whether the transferee is a holder
in due course, the negotiation takes effect as of the time when
the indorsement is actually made.
Application: instrument payable to order, where indorsement of the payee is
necessary for negotiation.
Lack of Indorsement: transferee cannot negotiate the bill by indorsing it to
another. The transaction operates as an equitable assignment and the
transferee acquires the instrument subject to defenses and equities available
among prior parties. He cannot negotiate it.
Transferee: acquires legal title and the right to have the indorsement of the
transferor and the right as holder of the legal title and maintain legal action
against the maker, acceptor, or other party liable.
Note: before the indorsement is made, the transferee is not a holder of the
instrument – not a holder because he is not a payee or indorsee; thus, they do
not enjoy the presumption of ownership in favor of holders.
Note: this only applies to transfer without indorsement of an instrument FOR
VALUE; if gratuitous, the transferee has no right to compel the transferor to
make the indorsement, but he has a right to sue thereon.
Indorsement after transfer: transferee may require transferor to indorse the
instrument because he has the right to an unqualified indorsement, unless the
contrary is proven.; such indorsement converts the transfer into a negotiation
and makes the transferee a holder – indorsee in possession (does not
retroact).
Sec. 51. Right of holder to sue; payment. - The holder of a
negotiable instrument may to sue thereon in his own name; and
payment to him in due course discharges the instrument.
Holder: the payee or indorsee of a bill or note who is in possession of it, or the
bearer thereof, entitled to receive the sum for which it calls; includes: (1)
persons possessing bearer instruments; (2) Payees possessing order
instruments; (3) Indorsees possessing order instruments
Three classes of Holders of Negotiable Instruments:
1. Holders simply
2. Holders for value
3. Holders in due course
Ordinary Holder: qualifies as a holder but does not meet all the conditions to
qualify as a holder in due course
Person OTHER THAN a Holder in Due Course: the negotiable instrument is
subject to the same defenses, whether real or personal, as if it were non-
negotiable.
Note: Secs. 58-59 provides that a holder who is not himself a holder in due
course but derives his title from a HOLDER IN DUE COURSE is given the rights of
such prior holder.
Taking for Value:
- essential to the status of a HOLDER in DUE COURSE – where the right to
enforce an instrument free from certain defenses stems
- For a HOLDER for VALUE – he may enforce the liability of an
accommodation party notwithstanding that the time of taking he knew
that such party is only an accommodation party
- Note: time and extent to which value is given is material on the question
of status as holder in due course
Note: A holder of a negotiable instrument is not necessarily the owner thereof.
Rights of a HOLDER:
1. To Sue – he may sue on the instrument in his name; however, a person
who not the payee or is the holder of a bad check has no personality to
sue and has no cause of action
2. To Receive Payment – he may receive payment and if the payment is in
due course, the instrument is discharged.
Payment in due course: payment made:
1. At or after the maturity of the instrument
- Note: if the instrument is paid before maturity, the prior party who
reacquires the same, may reissue and further negotiate it under
2. To the holder thereof
3. In good faith and without notice that his title is defective
Right of Transferee of Unindorsed Instrument to Sue: Jurisprudence is
inconsistent; transferee of an unendorsed instrument is NOT a holder, however,
it is believed that he can still sue because the transfer vests him such title as
the transferor had, and if the latter had LEGAL TITLE, this must pass by the
transfer.
Sec. 52. What constitutes a holder in due course. - A holder in due
course is a holder who has taken the instrument under the
following conditions:
(a) That it is complete and regular upon its face;
(b) That he became the holder of it before it was overdue, and
without notice that it has been previously dishonored, if
such was the fact;
(c) That he took it in good faith and for value;
(d) that at the time it was negotiated to him, he had no notice
of any infirmity in the instrument or defect in the title of the
person negotiating it.
Holder in Due Course:
- took the instrument and all the conditions given by Sec. 52 are present
- takes the instrument FREE of MOST defenses and adverse claims to it by
other parties
- also called a bona fide holder or bona fide holder for value without
notice
Negotiation: operates as a valid transfer to make the transferee a holder in
due course
If all conditions are present: he is qualified as a holder in due course. EVERY
HOLDER IS GENERALLY DEEMED PRIMA FACIE A HOLDER IN DUE COURSE.
Holder: payee or indorsee of a bill or note, who is in possession of it, or the
bearer thereof.
Status as Mere Assignee:
- a holder of a non-negotiable instrument cannot attain the status of a
holder in due course; he is a mere assignee subject to defenses
- part indorsee is merely an assignee
- transferee who receives an Instrument other than by issue or negotiation
cannot be regarded as a holder in due course
Presumption: there is a PRIMA FACIE presumption that the holder is a holder in
due course, the burden of proving otherwise lies in the person disputing the
presumption
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 Negotiable Instruments
Atty. Rommel Mercado
Rights of the Holder NOT in Due Course: the instrument is subject to defenses
as if it were non-negotiable
Rights of the HOLDER IN DUE COURSE: most-favored status under the law;
takes the instrument free of many defenses that exist between the original
parties; may acquire greater rights than those possessed by the payee or
holder
Payee as a holder in due course: there are two views on whether the payee
is entitled the same protection as a holder for value
1. CONTRARY VIEW - the holder in due course must have acquired the
instrument through negotiation and an instrument is issued and not
negotiated to a payee.
2. AFFIRMATIVE VIEW - payee may be a holder in due course under any of
the circumstances in which he meets the requirements of Section 52.
Note: Majority of jurisprudence supports the affirmative view
Drawee as Holder in Due Course:
- a drawee does not, by paying a bill, become a holder in due course
under this section
- when the drawee accepts and pays the instruments, it strips its
negotiability and reduces it to a voucher or proof of payment
Instrument Complete and Regular Upon Its Face:
1. Wanting in any material particular
- Instrument is INCOMPLETE when it is wanting in any material particular
or other particulars without which the instrument is incomplete
- If a holder offers an INCOMPLE ISNTRUMENT, he has the duty to inquire
as to why it is incomplete.
- If he fails to do so, he takes the instrument subject to all defenses and
equities
- if the omission is not an important particular, such omission will not
deprive the holder of the right of a holder in due course
2. Alteration apparent on face of the instrument
- To render the instrument irregular, alteration, tampering or erasure
must be visible or apparent on the face of the instrument, for if it is not
apparent, the matter is governed solely by Section 124 which renders
the instrument void.
Holder Before Instrument is Overdue:
1. When instrument is overdue: after date of maturity, either:
- Date of maturity is the time fixed therein
- If payable on demand, date of maturity is determining by the date of
presentment, which must be made within a reasonable time after
issuance.
- If the instrument is with a fixed maturity calendar date, it is overdue at
the beginning of the day after the fixed date
- If payable on occurrence of an event which is certain to happen, the
date of maturity is fixed by the happening of the event and becomes
overdue the next day after said date.
2. Overdue instrument puts all persons on notice
- A negotiable instrument in circulation past its maturity date carries
strong indication that it has been dishonored;
- An overdue paper puts all persons on notice that it may not have
been paid because of a valid defense to such payment.
- Note: on fixed date, the debtor has the WHOLE DAY to pay
3. Overdue instrument still negotiable
- It is still negotiable although subject to defenses existing at the time of
transfer
- Not subject to the same defenses as if it were non-negotiable
Instrument in part of overdue and in part not:
1. Where installments due before transfer
- An installment note is not overdue as o installments due before transfer
and the transferee cannot be a holder in due course as to such
installment, with or without notice of non-payment
2. Where transferee without notice of non-payment
- He is a holder in due course as to installments to mature in the future
- If there is no acceleration clause, the fact that maturity of one or more
installments have passed does not make the instrument overdue as to
installments payable in the future
o Circulation of a negotiable instrument after due date of an
installment (except the last) cannot serve as notice that the
installment has not been paid
o If the principal obligation is overdue, then the instrument is overdue
after maturity of the first installment
o The possession by the payee of holder with one or more installment
overdue does not signify dishonor – he retains it for collection of the
balance
o Assuming that non-payment of installment is tantamount to
dishonor of the whole instrument, the holder has no notice of
dishonor unless he has notice of non-payment
3. Where transferee with notice of non-payment
- He cannot be a holder in due course (without explaining or pointing
to legal basis
- Dissenting Opinion (refer to book)
Holder without notice of dishonor
1. Ways and time of dishonor
- Instrument may eb dishonored by (1) Non-acceptance; or (2) Non-
payment
- Dishonor of non-acceptance refers to bills of exchange and may
occur even before date of maturity
- Dishonor of non-payment takes place at the time of maturity
2. Negotiation after maturity or dishonor
- An overdue or dishonored instrument may still be negotiated either by
indorsement or delivery
- In case of negotiation by INDORSEMENT of an overdue or dishonored
instrument, the holder cannot be a holder in due course
- In case of negotiation by DELIVERY of an overdue or dishonored
instrument, the holder without notice can be a holder in due course
3. Non-payment of Interest Due – the fact that interest is unpaid, and the
principal is not yet due, does not render the note dishonored
Holder in Good Faith
1. Meaning of Good Faith
- Sec. 52 (c) refers to good faith of indorsee or transferee
- Honesty in fact in the transaction concerned without knowledge or
notice of any material fact which would render it dishonest
- Case to case basis
2. Proof of Good Faith
- Determined by the facts and circumstances of the case
- Honesty of intention and absence of suspicious circumstances,
- if such circumstances exist, then such inquiry as will satisfy a prudent
man of the validity of the transaction
3. Meaning of Bad Faith
- The person to whom the instrument is negotiated must have actual
knowledge of the infirmity or defect or knowledge of such facts which
render it dishonest form him to take a negotiable instrument
4. Proof of Bad Faith
- Prove that he has actual knowledge of the defect or ignored the fact
of such defect
- Not necessary that it be knowledge of the exact truth, just the facts
which tend to show that there was something wrong with the
transaction
5. Equitable Doctrine of Clean Hands
- He knew from the face of the instrument that there was defect or
infirmity, therefore, he cannot seek relief from the court
Effects of Crossing a Check: the drawer intends the check to be deposited
only by the rightful person – the payee named therein. Crossing a check has
the following effects:
1. It may not be encashed but only deposited in the bank
2. The check may be negotiated only once
3. Serves as a warning to the holder that the check has been issued for a
definite purpose so that he must inquire if he has received the check
pursuant to such purpose, otherwise, he is not a holder in due course
Note: Holder cannot claim he acted in good faith when it was aware that the
checks were crossed and bore restrictions when it accepted them
Note: holder may still recover from the party who indorsed or encashed the
check if the latter has no valid excuse for refusing payment
Holder for Value
1. Adequacy of Consideration
- any consideration sufficient to support a simple contract is VALUE
- Not necessary that it be adequate or that it represents full value
- If grossly inadequate or unreasonable, it raises a suspicion of bad faith
- Love and affection do not constitute value
2. Taking of Instrument for Value
- Taking for value is the right to enforce an instrument free from certain
defenses
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 Negotiable Instruments
Atty. Rommel Mercado
- Holder for value may enforce the liability of an accommodation party
notwithstanding that at the time of taking he knew that he was only
an accommodation party
- Time when and the extent to which value is given is material in
determining a holder in due course
3. Three methods of giving value for an instrument: A holder takes the
instrument for value
a. To the extent that the agreed consideration has been performed or
that he acquires a security interest in or a lien on the instrument
otherwise than by legal process
b. He takes the instrument in payment of or as security for an antecedent
claim against any person whether or not the claim is due
c. When he gives a negotiable instrument for it or makes an irrevocable
commitment
Note: each method involves actual performance by the holder an not
just a commitment or promise to do something
Holder without notice of infirmity in instrument or defect of title
1. Notice at time of negotiation
- At the time the instrument was negotiated to him, he had no notice of
any infirmity in the instrument or defect in the title of the person
negotiating it
- Every holder is deemed prima facie a holder in due course
2. Lack of Bad Faith
- In order for there to be NOTICE, the holder must have actual or
chargeable knowledge of the infirmity or defect or must have acted
in bad faith
3. Bad Faith of Agent
- Considered as constructive knowledge of the principal and will render
him a holder NOT in due course
Sec. 53. When person not deemed holder in due course. - Where
an instrument payable on demand is negotiated on an
unreasonable length of time after its issue, the holder is not
deemed a holder in due course.
Holder in Due Course In Instrument Payable on Demand:
- Holder in due course is someone who became a holder thereof before it
is overdue – it applies only to an instrument payable at a fixed or
determinable future time
- Sec. 53 governs instruments payable on demand
- If negotiation is made OUTSIDE of REAONABLE TIME after its issuance, the
holder cannot be deemed a holder in due course
- The fact that it has been in circulation for a long time is a strong indication
that it has been dishonored
- Reasonable Time – indefinite; refer to the nature of the instrument, the
usage of trade or business with respect to such instrument, and the facts
of the particular case
Sec. 54. Notice before full amount is paid. - Where the transferee
receives notice of any infirmity in the instrument or defect in the
title of the person negotiating the same before he has paid the
full amount agreed to be paid therefor, he will be deemed a
holder in due course only to the extent of the amount therefore
paid by him.
Effect of Notice Before Full Payment:
1. No amount has yet been paid – the instrument is taken but the purchaser
has not yet paid and receives notice of infirmity or defect of the HOLDER,
he is relieved from the obligation to make payment
2. An amount has been paid
- if it was transferred to him in consideration of his promise to make
future payments, he is under no legal obligation to pay the balance
of the amount he has agreed upon discovery of infirmity or defect
- If he does, he can be considered as a holder in due course ONLY TO
THE EXTENT of the amount theretofore paid to him
Applicability of Sec. 24: It involves a situation where the holder must protect
himself by refusing to make further payments
1. Applicable ONLY where the obligation incurred by the holder is that such
upon discovering the infirmity, he is relieved from all further obligations.
He has a valid defense not to pay the remaining balance
2. It does not apply where the holder received the paper and gave his
promise which he must perform when he has incurred liability to a third
person – he has the same protection as one who has paid the instrument
at the time of the transfer
Sec. 55. When title defective. - The title of a person who
negotiates an instrument is defective within the meaning of this
Act when he obtained the instrument, or any signature thereto,
by fraud, duress, or force and fear, or other unlawful means, or
for an illegal consideration, or when he negotiates it in breach of
faith, or under such circumstances as amount to a fraud.
Defective Title In General:
1. Defects of Title – personal or equitable defenses and those equities of
ownership where there is ab breach of faith in negotiation
2. Infirmities – things that are wrong with the instrument itself as distinguished
from those things that are lacking in the contracts of the instruments (ex.
Date, material particulars, delivery)
When title of a person is defective:
1. In the acquisition – he obtained the instrument or any signature thereto
by fraud, duress, or force and fear, or other unlawful means, or illegal
consideration
2. In the negotiation – he negotiates the instrument in breach of faith, or
under such circumstance as amount to fraud
Good Faith of Taker and Negotiator
- Sec. 55 seeks to prevent someone who takes an instrument with notice
that his transferor is not acting honestly from becoming a holder in due
course
- Emphasizes the honesty of the negotiator as brought to the notice of the
taker
- Generally, to require an honest and fair transaction to constitute one as
a holder in due course
Sec. 56. What constitutes notice of defect. - To constitutes notice
of an infirmity in the instrument or defect in the title of the person
negotiating the same, the person to whom it is negotiated must
have had actual knowledge of the infirmity or defect, or
knowledge of such facts that his action in taking the instrument
amounted to bad faith.
Notice: the transferee must have actual knowledge of the infirmity in the
instrument or defect; in the title of the indorser or knowledge of such facts that
his action in taking the instrument amounts to bad faith. Actual knowledge is
shown by the instrument itself.
Mere negligence to make inquiries is insufficient: negligence to make inquiries
is not the equivalent of bad faith or actual knowledge. The test is whether the
transferee had notice of the defect or infirmity or have reasonable suspicions.
This is a question of fact. Thus, consulting an attorney before taking of the note
or the fact that the payee indorsee “without recourse” constitute a badge of
guilty knowledge.
When knowledge amounts to bad faith: If the holder had actual knowledge
of suspicious circumstances coupled with means of readily informing himself
of the facts and he willfully abstained from doing so, his intentional ignorance
may amount to bad faith.
- It is not necessary that the holder had knowledge of the particulars of
the fraud. All that is required is knowledge of facts that his action in taking
the instrument amounted to bad faith.
- Inadequacy of price is in itself insufficient to show bad faith. However, if
it is grossly inadequate, it may justify a finding of bad faith
- Where an instrument is signed by an insolvent person, such circumstance
alone to require the purchaser to make inquiry as to the genuiness of the
instrument. If he fails to do so, he cannot be deemed as a bona fide
purchaser.
Effect of notice of defect: Knowledge or chargeable notice of any defect at
the time of the taking of the instrument destroys the status of a holder as a
holder in due course. It opens him up to defenses otherwise cut off against
him and not merely relating to the defect of which he had notice. This does
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 Negotiable Instruments
Atty. Rommel Mercado
not however, modify the rule that the one holding from a holder in due course
may have all the rights of the latter.
Doctrine of the illustrative cases:
1. If the holder refuses to say how he obtained the note, he is not a holder
in due course. His silence proves that he had notice of the defect of his
title from the start.
2. The moment that the check was stolen/lost, no on outside of P (maker)
can be called a holder in due course P had not indorsed it in due course.
Doctrine of constructive notice is inapplicable: Constructive notice, such as
notice of lis pendens, cannot be considered as notice to a purchaser of a
negotiable instrument secured by a mortgage on the land. This does not
amount to bad faith.
The following, standing alone, does not constitute notice:
1. The instrument is antedated/ postdated
2. It was issued or negotiated in return for an executory promise or
accompanied by a separate agreement, unless the purchaser has
notice that a defense or claim has arisen from its terms
3. Any party that has signed for an accommodation party
4. An incomplete instrument that was completed, unless the purchaser has
knowledge of any improper completion.
5. Any person negotiating the instrument that was or is a fiduciary
6. Default in payment of interest on the instrument or in payment of any
other instrument except one of the same series.
7. Filing or recording of the document. Unless notice was received at such
time and in such manner as to give the holder a reasonable opportunity
to act on the information. It must have been received before the holder
receives the interest.
Sec. 57. Rights of holder in due course. - A holder in due course
holds the instrument free from any defect of title of prior parties,
and free from defenses available to prior parties among
themselves, and may enforce payment of the instrument for the
full amount thereof against all parties liable thereon.
Rights of a holder in due course:
1. He may sue on the instrument in his own name
2. He may receive payment and if the payment is in due course, the
instrument is discharged.
3. He holds the instrument free from any defect of title of prior parties.
4. He holds the instrument free from defenses available to prior parties
among themselves
5. He may enforce payment of the instrument for the full amount thereof
against all parties liable thereon.
Importance and foundation of due course holding:
- A holder in due course acquires a better right than any of his
predecessors because he takes the instrument free from most defenses
available to prior parties among themselves. Thus, the fact that it has
been stolen or negotiated in breach of faith or has not been delivered is
no defense against a holder in due course. He may still enforce the full
amount of the instrument w/o regard to the amount he paid for it.
- This is founded on public policy, with regard to the utility, free circulation
and credit of negotiable paper in the commercial world. The
convenience and necessities of commerce requires negotiable
instruments which can pass freely in the commercial world as legal
tender and demand the protection of those holding them in due course.
This protection is sometimes explained as estoppel. Thus, one putting
negotiable paper in the market is estopped from contesting the
consequences and incidents of his acts. The one who made the wrong
possible is estopped by his neglect.
- A holder in due course is subject ONLY to REAL DEFENSES. This is a
necessity if commercial papers are to circulate freely and prospective
purchasers are to accept them routinely and willingly.
- In case of immediate parties, all defenses are available
Sec. 58. When subject to original defense. - In the hands of any
holder other than a holder in due course, a negotiable
instrument is subject to the same defenses as if it were non-
negotiable. But a holder who derives his title through a holder in
due course, and who is not himself a party to any fraud or
illegality affecting the instrument, has all the rights of such former
holder in respect of all parties prior to the latter.
Defenses: grounds or reasons pleaded or offered by the defendant in a case,
showing why the plaintiff, as a matter of law or fact, should not be given the
relief he seeks.
Kinds of Defenses in Negotiable Instruments:
1. Real, Absolute, or Universal
- available against all parties, both immediate and remote, including
holders in due course or holders through the latter
- a holder in due course is not legally entitled to payment from the
primary party
- Attaches to the instrument itself, regardless of the merits or demerits of
the holder or the conduct or agreement of the parties to it
- Challenges the validity of the instrument and the instrument cannot
be enforced because there is no contract in the first place
- HOWEVER, it is only unenforceable against the party entitled to set up
the defense but not against those to whom such a defense is not
available
- GENERALLY, a real defense applies only to the person who has made
or drawn the instrument.
2. Personal, limited, or Equitable
- grow out of the agreement or conduct of a particular person in regard
to the instrument which renders it inequitable for him, though holding
the legal title, to enforce it against the party sought to be made liable
but which are not available against a holder in due course or holders
with all the rights of a holder in due course
- available only against that person or subsequent holder who stands in
privity with him
Samples of real defenses
1. Incapacity
2. Illegality of the contract, unless the maker is part of the illegality
3. No delivery of an incomplete instrument
4. Forgery
5. Want of authority, apparent or real
6. Duress, when one takes the hand of another and forces him at gunpoint
to sign his name. If there is only a vague threat- personal only. The threat
must be so overwhelming that the victim is entirely deprived of his will.
7. Fraud in factum or fraud in esse contractus
8. Fraudulent alteration by holder
9. Prescription
10. Other infirmities on the face of the instrument
11. Discharge at or after maturity
Note: A real defense questions the legal validity of the instrument while a
personal defense affects only the validity of the agreement for which the
instrument is issued. The validity of the instrument is recognized, it is the
underlying agreement that is in question.
Sample of personal defenses:
1) Filling of wrong date
2) Filling out of blanks not in accordance with the authority given and
within reasonable time
3) Want of delivery of complete instrument
4) Absence or failure of consideration
5) Simple fraud or fraud in inducement
6) Acquisition of the instrument (not signature) by duress, force, fear
7) Acquisition of the instrument by unlawful means
8) Acquisition of the instrument for an illegal consideration
9) Negotiation of breach of faith
10) Negotiation under fraudulent circumstances
11) Innocent alteration or spoliation
12) Set off bet. Immediate parties
13) Discharge by payment or renunciation or release before maturity
14) Discharge of party secondarily liable by discharge of prior party
15) Usury- agreed interest is void
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 Negotiable Instruments
Atty. Rommel Mercado
16) Want of authority of agent who has apparent authority 3. XPN to XPN: (a) When proof has been offered of the genuineness of the
maker's and payee's signatures, the holder is deemed to be a holder in
Immediate parties: parties in direct contractual relation. Signifies privity not
due course and the duty of proceeding to offer some proof of fraud or
proximity.
defect specified, is cast upon the party alleging it; (b) in cases against a
Remote parties: one who takes title to an instrument by negotiation from the party who became bound on the instrument prior to the acquisition of
original payee or any subsequent holder. such defective title
Prior parties: parties who acquired the instrument before the holder in due
course.
Fraud in Factum/ Fraud in the Fraud in the inducement/ simple
execution fraud
- Real defense bec. There is no - Related to the quanity, quality,
contract value or character of the
consideration for the instrument.
- Exists in cases in which a
person, without negligence, - In this case, the signer has
was deceived in signing a knowledge that what he is
negotiable instrument without signing is a negotiable
knowledge that such instrument. The deceit is in its
document was a negotiable amount or terms. It implies that
instrument. the signer knew what he was
signing but that he was induced
- Exception: when in the
by fraud to sign.
exercise of reasonable
diligence he could have
discovered the nature of the
instrument

Rights of a holder not in due Rights of purchaser from a holder in

course
- He may sue on the instrument
in his own name
- He may receive payment
and if the payment is in due
course the instrument is
discharged
- Entitled to the instrument but
subject to the same defenses
as if it were non-negotiable
- Has all the rights if a HIDC from
whom he derives his title in
respect of all perties prior to
such holder, provide that he
was not a part of any fraud or
illegality affecting
instrument.
due course
- If instrument is from HIDC then has
all the rights of the latter even if
he is only a transferee or does not
satisfy the requirements of a HIDC
- 2 requisites for him to acquire the
rights of a HIDC:
(a) The derives his title from a
HIDC
(b) he was not party to any
illegality or fraud affecting
the instrument
- a payee or indorsee who has a
defective title cannot better it by
selling the instrument to HIDC and
the
re-acquiring it again

Sec. 59. Who is deemed holder in due course. - Every holder is

deemed prima facie to be a holder in due course; but when it is
shown that the title of any person who has negotiated the
instrument was defective, the burden is on the holder to prove
that he or some person under whom he claims acquired the title
as holder in due course. But the last-mentioned rule does not
apply in favor of a party who became bound on the instrument
prior to the acquisition of such defective title.
Presumption: every holder is deemed prima facie to be a holder in due course
if he is a payee or indorsee who is in possession of the instrument, or the bearer
thereof.
Proof of being a holder: Once the person through whose hands an instrument
has passed shows that he is a holder, he does not have to prove that he
acquired the instrument in where all condition under Sec. 52 are present
Indorser’s Title Defective: the burden of proof shifts to the holder who must
show he is a holder in due course
Note: A person who acquires title from a prior holder in due course is referred
to as holder through a holder in due course.
Rules:
1. GR: Holder is deemed prima favie to be hodler in due course
2. XPN: When the title of any person who has negotiated the instrument
was defective , he must show that he is a holder in due course
19